The upside of a downturn
UK GDP fell 0.2 per cent in the first quarter of this year following a reduction of 0.2 per cent in the fourth quarter of 2011. In the 12 months to the first quarter of 2012, real GDP is estimated to have been flat.
Excluding oil and gas production, GDP fell by 0.1 per cent in the first quarter. A further contraction in output means that real GDP growth in 2012 as a whole is now likely to dip below 1 per cent.
We are, however, awaiting a revision from the Office for National Statistics, because there is every possibility that the underlying data is stronger than suggested.
The UK consumer price index has fallen from 5.2 per cent in September 2011 to 3.5 per cent in March this year. This means inflation is easing slightly, which could boost households’ real incomes. For the first time in a while, the UK might also see an overall increase in real wages, helping to ease tight consumer conditions.
Where does this leave investors? At this stage, we would place more emphasis on strong corporate profits than GDP. On the day of the GDP announcement, the FTSE 100 finished up 0.16 per cent.
Anecdotally, most of our companies reported encouraging results during the previous quarter, remembering, of course, that a vast amount of FTSE 100 revenues are earned outside of the UK.
But let’s make no bones about it – the increased risk of unemployment, together with trying consumer credit conditions and the ongoing fiscal squeeze, means significant headwinds to the UK economy remain in the medium term.
It is therefore highly likely the UK economy could continue to underperform for a while longer.
On a positive note, this also means there is room to surprise on the upside – the markets are less insular and look increasingly preoccupied with the rest of the world. Companies with breadth and strong balance sheets should act as a buffer and support growth where opportunities exist.
Julian Chillingworth is chief investment officer at Rathbone Unit Trust Management.