Global economy data sparks doubts over UK

Strategists have warned investors not to get carried away by the signs of improvement in the UK economy and have predicted a drawn-out and fragile recovery.

The International Monetary Fund (IMF) last week revised its growth forecast for the UK in 2013 up to 0.9 per cent, in a report that was largely negative on the rest of the globe.

But the fact the report presented a disappointing global outlook has led strategists to be cautious about the UK’s growth prospects because of the country’s reliance on the strength of other economies.

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Frances Hudson, global thematic strategist at Standard Life Investments, highlighted the weak trade data from around the globe, demonstrated last week by particularly disappointing figures from China, as an indication of weak global demand.

She said: “So if the UK is looking to base its recovery on exports and an improvement in manufacturing, then that looks very ambitious.”

A manufacturing-led recovery was dealt a further blow when a report from the Office for National Statistics showed that the manufacturing sector shrank by 0.8 per cent in May, which contrasted strongly with purchasing managers’ index surveys that indicated the sector had expanded.

Dan Morris, global strategist at JPMorgan Asset Management, said the manufacturing data wasn’t nearly as important as the services sector, which makes up more than 70 per cent of the UK’s economic output.

However, while indicators of domestic consumption have been improving recently, Mr Morris highlighted a potential problem for the sector in stubbornly high inflation, which is currently at 2.7 per cent.

He said: “Inflation is trending higher but wage growth has been low for quite some time. This is bad for consumers, and there is a real risk to consumption if this gap exists.”

The strategists were cautious on the outlook for the UK stockmarket, too, which has rebounded quite strongly after its correction following the US Federal Reserve’s indication that it will taper its quantitative easing programme.

Ms Hudson said she did not think the Fed would slow its bond purchases as quickly as the market was expecting because the decision to taper was still very “data-dependent”.

But she said whatever happened about tapering would have a bigger effect on the UK stockmarket than any news from the UK itself.

Robert Jukes, global strategist at Canaccord Genuity Wealth Management, said without supportive earnings growth – which he did not see as particularly likely – the UK would have a “volatile and sideways-moving market”.

He added that markets were already “towards the upper part of the range” they would trade in.

With the outlook for growth still tentative, Mr Jules said he could see no catalyst for cyclical companies to reverse their underperformance compared to defensive yielding sectors, which have been driving markets since 2011.

“Bond yields still need to be much higher to make that move away from defensives, so to do so now would really be a bit premature,” he said.