The UK economy has been driven by strong housing prices that have kept the consumer spending. Howeve...
The UK economy has been driven by strong housing prices that have kept the consumer spending. However, consumer spending is expected to slow either through government intervention, a fall in the housing market or the weakening equity markets.
Steve Clayton, UK equity fund manager at Dresdner RCM, says so far this year the economy has performed better than expected. This has been because consumer spending has remained buoyant because of the strong housing market.
However, going forward the UK economy is at a crossroads because of weakness in equity markets, says Clayton.
Tony Dolphin, director of global economics at Henderson, does not think the falling stock market will have an impact on the economy. He says most people invested in the market only invest what they can afford to lose. The bigger impact is on companies and profits if they are not able to meet costs.
He warns that consumers could become worried and start to spend less. He thinks it also may cause consumers to lose confidence in the housing market. At the moment this is not a central projection but could be a risk factor.
Although Clayton does expect growth rates to moderate due to the tax rises announced in the budget. They should act to slow consumer spending.
The question is how much the UK economy will slow. Clayton warns if the housing market falls sharply then the UK could go into recession. He says too many people are looking at interest payments and ignoring the fact capital has to be paid.
Dolphin says housing prices over the whole economy will grow but by a small amount and in some regions in London he expects prices to decrease. The areas most likely to decrease are the ones that are dependent on sales from investment bankers as they are not likely to receive the large bonuses as they have in the past. In addition, the buy to let market is filtering out because companies are bringing fewer staff over to work from abroad.
According to Dolphin, the question is whether consumer spending in the UK economy will have to slow on its own accord or whether the government will have to push up interest rates to get it to slow. He expects the Bank of England to raise rates from 4% to 5% by the middle of next year.
The economy is operating at close to full capacity and if consumer spending does not slow inflation may increase, says Dolphin. He expects inflation to go up from 1.5% to 2.5%, but average wage inflation to stay the same at 3.5% which will cause consumer spending to slow.
Dolphin thinks all leading indicators are saying the economy is doing better rather than worse. He forecasts GDP will be 1.5% this year and 3% next year.
fund manager comment: JP Morgan
With the FTSE 100 currently trading more than 40% lower than its all-time high, and UK share price valuations attractive both against bonds and relative to other stock markets, now is definitely the time to be looking for undervalued opportunities in the stock market.
UK economic fundamentals are sound, with strong household consumption supported by ongoing low unemployment. This economic strength is being reflected in a recovery in corporate earnings.
Although domestic economic conditions and share price valuations are supportive, the international environment is not. A major source of instability is the world's largest economy and stock market ' the US.
Three themes are troubling the US stock market at present: High existing stock market valuations relative to history, a growing suspicion Wall Street and corporate America has been fleecing the US investor for years, and fears of a renewed downturn in the economy. These concerns have dented sentiment in the US, and the problems now need time to unwind.
The UK stock market is likely to mirror its US counterpart until some stability returns to Wall Street. The two markets have always been closely correlated. Those economies move in similar cycles, and cultural similarities have encouraged a high level of investment between the two countries. It is unavoidable that shocks in the US are transmitted to the UK.
But the US will sort itself out over the coming six months. Over-optimistic earnings forecasts will be scaled back, leading to lower, but more solid, valuations. Accountancy and regulatory bodies are now under intense pressure to reform.
When sentiment improves on Wall Street, it will immediately be reflected in the UK where the stock market appears attractively valued and supported by a strong domestic economy.
Tom Elliott is strategist at JPMorgan Fleming
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