EconomyAug 8 2017

UK growth to enter ‘fallow period’

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UK growth to enter ‘fallow period’
Quarterly UK GDP growth since 2013

Investors have said a “fallow period” of economic growth could last for the next two years, after second quarter UK GDP figures undershot expectations and forecasts were downgraded.

Last month the International Monetary Fund (IMF) lowered its estimate for 2017 UK GDP growth from 2 per cent to 1.7 per cent, blaming “weaker-than-expected activity in the first quarter”.

An initial estimate of second-quarter UK GDP growth, released days later by the Office for National Statistics, appeared to support this view, as did subsequent forecast revisions from the Bank of England. 

Growth ticked up from 0.2 per cent to 0.3 per cent in the second quarter, but the services sector was the only part of the economy to expand over the period.

Laith Khalaf, senior analyst at Hargreaves Lansdown, suggested the IMF forecast revisions was a belated reaction to already “poor economic performance, and may yet prove too optimistic”.

“It is predicting [GDP growth] at 1.7 per cent, which may well be the case, but you would need a pretty strong economic performance in the second half of the year,” he said.

Most believe this slowdown has already been factored into investment decisions. 

Adrian Lowcock, investment director at Architas, said: “Most advisers had already made decisions ahead of this drop. The key issue in the past year was the Brexit [vote], which has already happened.”

He added that if advisers were to react to economic changes, it is probable they would “move investments away from domestic stocks to international”.

Mr Lowcock argued that domestic stocks should still be attractive to investors, despite the fact they are more dependent on the slowing UK economy. 

But his view is not shared by all. Charles Hepworth, investment director at Gam, said the figures affirmed “our cautious view on UK assets, particularly domestic equities and sterling”.

David Page, senior economist at Axa Investment Managers, said: “Our own view is that this more subdued pace of activity is likely to persist. 

“We think this is likely to see the BoE leave the bank rate unchanged not only in 2017, but also throughout next year.”

An initial sign of the central bank’s caution emerged last week when its Monetary Policy Committee [MPC] voted 6-2 to keep rates on hold at 0.25 per cent. The MPC had voted by a narrower 5-3 margin to keep rates unchanged in its previous meeting in June.

The repercussions from Brexit uncertainty are large contributors to the waning economic growth, according to Premier Asset Management UK equity head Chris White.

“The government is cautious about increasing expenditure despite the electorate’s concerns about austerity,” he said, attributing this trend to a “lack of consensus and clarity surrounding Brexit”.

“While this does not mean we are the new ‘sick man of Europe’, we should expect a more fallow period of economic growth over the next couple of years.”

The UK was not the only region to experience a downwards revision to forecasts by the IMF. 

The organisation’s expectations for US GDP growth were cut from 2.3 per cent to 2.1 per cent for this year, and from 2.5 to 2.1 per cent for 2018.

However, US growth for the second quarter subsequently came in ahead of market expectations on an initial estimate, rising from 1.2 per cent in the first three months of the year to 2.6 per cent – slightly above the consensus prediction of a 2.5 per cent rise.

 

IN NUMBERS

0.3% 

UK GDP growth in the second quarter 

6-2

MPC vote to keep interest rates on hold in August