Stagnation, uncertainty and downturn are hardly the words that the UK government wants associated with the economy, especially with the third general election in four years on the way in only a matter of weeks.
Nevertheless, these themes feature heavily in the responses from researchers, analysts and investment directors across the asset management industry to the latest UK GDP results. Although asset managers and investment experts can find opportunities in almost any macroeconomic situation, the outlook on industry figures provided on the UK’s economy was unmistakeably gloomy.
The UK economy has narrowly avoided the possibility of a technical recession, with GDP growth rebounding from the reported 0.2 per cent contraction in the second quarter of the year. The latest figures released by the Office of National Statistics show that during the third quarter, the UK’s GDP increased at a lowly rate of 0.3 per cent during the three-month period, with the economy approximately 1 per cent larger this year than it was at this stage in 2018.
Although the UK did not enter a technical recession, the annual growth rate has dropped to its lowest levels since 2010.
David Scammell, fixed income and macro strategist at Brown Shipley, argued that although UK GDP data has been volatile for a year, the latest results suggest a clear downshift in growth rates.
He explained: “Whilst avoiding a second straight quarter of contraction, and the stigma of a “technical recession”, the underlying tone of the latest report is weak and suggests that there is little growth momentum as we head into the final months of the year.”
Commenting on the matter from an investment perspective, he said the biggest issue was the uncertainty caused by macroeconomic factors.
Mr Scammell said: “Of most concern is the continuing malaise in business investment, which raises the likelihood that the economy slips into a more prolonged and entrenched downturn. Uncertainty abounds – political impasse, the Brexit outcome and the worsening global backdrop - and the obvious response in normal times would be for the Bank of England to lower rates.”
This somewhat gloomy perspective was echoed by Artur Baluszynski, head of research at Henderson Rowe, who believed modest growth was likely to become a running theme for the UK economy.
Forecasting the future, he said: “The UK has ducked a recession but has seen the weakest growth in a decade. Brexit aside, the UK will struggle to expand if the rest of the global economy is slowing down. After a strong July and August, September was weaker. We would expect next quarter to remain modest, despite the seasonal boost, as trade tensions and political uncertainty are set to continue.”
Andy Scott, associate director at JCRA pointed to sterling’s lack of reaction to the news with the UK’s third general election in four years looming on the horizon, and the consequences of the extensive delays in the UK’s secession plans.
Expecting the economy to face further difficulties, he said: “Today’s data contains nothing particularly surprising and hence sterling barely reacted with a shrug. The continual delay to the Brexit process means the UK remains an uncertain environment to invest in for businesses, which results in slower growth. The fact that a general election is under way in the fourth quarter, with the risk of either a hung parliament, or potentially a socialist Labour party forming a coalition government, suggests a further deceleration or stagnation as we close out 2019. While the fog of Brexit hangs in the air, the clouds over the economy continue to darken.”
He also did not foresee any particularly positive opportunities for GBP investors during this period of political uncertainty.
Mr Scott added: “Sterling meanwhile has taken the decision to have an early general election and the news that two Bank of England members voted for a rate cut last week, largely in its stride. Sterling is currently trading at 1.28 versus the Dollar, down only 2 cents from a five-month high reached last month, while it is trading at 1.16 versus the Euro, less than half a cent from its recent highs. The next test for GBP investors is now only a month away, what to do if the betting odds are right and the most likely outcome is a hung parliament? While UK politics has been far from functional of late, increased instability in Westminster would surely cause even the most optimistic GBP bulls to rethink and retreat!”
Mr Scammell however, did suggest that the latest results were not exclusively negative, and that there could be a measured increase in growth levels following the election.
He said: “On a more encouraging note, the report also shows the resilience in both household and government spending. Whilst the former is vulnerable to a softening in the labour market, the latter looks set to underpin the economy in the years ahead. The election result may be an unknown, but both main parties are committed to expanding the fiscal front, and this could easily add upwards of 0.4% to growth next year.”
Andreas Billmeier, a sovereign research analyst at Legg Mason-affiliate Western Asset offered his perspective on the UK GDP data. He believed that although the UK clearly avoided a technical recession, the economy had performed below expectations of 0.4 per cent growth set out by the Bank of England.
He said: “We note that in a year of very volatile GDP data, this print was a touch lower than expectations by the market and the Bank of England, mainly due to a complete lack of stock-building ahead of the October Brexit deadline, in contrast to the Q1 experience
Mr Billmeier also made note of Moody’s response to the UK’s economic troubles.
He said: “Moody’s downgrade is a step that most other major rating agencies have already taken. Moody’s argue that Brexit-era uncertainty is characterized by ‘inertia and, at time, paralysis’ and views the debt burden, in conjunction with spending plans as spelled out by major parties, increasingly as a significant vulnerability.”
Explaining Western Asset’s outlook on the matter, he added: “We view this as Moody’s essentially catching up with other rating agencies and analysts. A fiscal deterioration is highly likely in almost every potential political scenario going into 2020.”
When it came to predicting the UK’s future growth rates, he shared the views of other prominent commentators about the importance of rectifying Brexit uncertainty and the result of the general election, but also emphasised the importance of the UK maintaining a strong relationship with the EU.
He said: “Going forward, the trajectory of GDP and the probability of a recession in 2020 depend critically on the outcome of the 12 December elections of course, but also, assuming Brexit does indeed take place, on the future relationship between the UK and its major trading partner, the EU, which is still to be negotiated.
“This, in turn, also provides a wide range of outcome for sterling and gilts. That said, our bias is for the pound to strengthen into the elections and for Gilt yields to move higher,” he concluded.
