In recent years, the UK has turned out to be the steadiest of all the G7 economies. Unlike the US,...
In recent years, the UK has turned out to be the steadiest of all the G7 economies.
Unlike the US, it avoided the excesses of the post-bubble downturn while enjoying better economic growth than the Eurozone. So far, the UK economy has not been unduly affected by higher oil prices and growth remains close to its long-term average of between 2%-3% per year.
There are three main drivers of economic growth in the UK: the public sector, the consumer and the corporate sector. What is the outlook for each?
Job creation in the public sector has been strong in recent years, providing a valuable counterbalance to a corporate sector that was cutting back on new investment. But in the spring Budget the Chancellor reduced future planned spending levels, so it is likely there will be a diminished contribution to growth, especially when recent Government spending has been higher than expected. The Chancellor also intends to limit public sector pay rises to 2% until 2011.
And although the consumer remains as precariously balanced as ever, the Bank of England has actually done a very good job in restraining consumer spending without harming the housing market. This is now buoyant enough to avoid fear yet still discourage excessive price rises.
The UK has already had a taste of higher gas and electricity bills which, along with high levels of personal debt, will curb spending at a time of modest wage growth. So - allowing for the World Cup blip - consumer spending should grow at somewhat below its average rate.
As such, most retailers look unattractive, apart from a few exceptions held in the Jupiter Income Trust including Carphone Warehouse and sports manufacturer Umbro. Similarly, the outlook is dull for many domestic banks, which have started to see a notable increase in bad debts in unsecured loans.
This leaves the corporate sector, where the news appears good. Demand for office space has been increasing at its fastest rate for two years with voids in London offices at their lowest level (8%) since 2002. Property companies such as Land Securities and British Land offer good exposure to this trend. Furthermore, the underlying recovery in manufacturing continues, supported by domestic and international demand, while the service sector is at its strongest for some two years. A rebalancing of the economy away from over-reliance on the consumer and public spending towards a growing corporate sector is just what the Bank of England wants.
Moreover, it is worth remembering a large part of a UK company's corporate profit comes from international operations. With the oil price likely to remain high, companies such as BP have pledged to return cash to shareholders via dividends and share buybacks.
Alongside higher energy prices, we have also seen a boom in commodity prices, driven in part by strong demand from China.
But the outlook for the economy is not necessarily the same as the outlook for equity, bond and comodity markets. With interest rates around the world rising, bonds have not been attractive. While in the UK, pension funds buying gilts to match their liabilities have, along with widening corporate spreads, left bonds looking distinctly unattractive as investors continue to reappraise risk.
Equities are a different matter. The recent market correction in May was long overdue and as a result markets should now move sideways for the rest of the summer and perhaps longer as there is still a lot of uncertainty around.
Economic growth remains strong
UK spending to grow below average
Bonds remain unattractive
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