Buxton, a veteran commentator on the UK economy said, the forthcoming recession ould likely be “shallow but lengthy rather than deep”.
He said: “The labour market remains strong, with many small businesses struggling to fill vacancies. Large companies have been giving employees semi-annual pay rises not annual, together with loyalty bonuses and spending vouchers. They are not going to flip overnight to firing workers they have been desperate to retain, meaning employment should remain high.”
He added: “Consumer balance sheets are in good shape – with the usual sad caveat about the extreme difference between the ‘haves’ and the ‘have nots’ – as enforced savings and debt repayments during the pandemic mean in aggregate, we enter a downturn without a worrying debt overhang.
Corporate balance sheets are equally reassuring, as companies raised equity capital where needed during the pandemic, so corporate failings through excessive debt are unlikely to be a feature of this downturn – unlike in the 1990-92 recession, after the Lawson boom of the late 1980s.
Buxton believes the elevated debt levels in global economies are now present in the balance sheets of governments, rather than private entities.
In terms of what this means for economies and markets, he said: “government debt is a reason why the headwinds to the UK economy are likely to be prolonged. Frozen or reduced tax allowances on incomes, dividends and capital gains at a time of inflation-driven pay increases will push more people into paying higher rates of tax than ever before. Moreover, this effect will build cumulatively over time if the freeze is maintained as the government intends over the next five years.
"Even if there is a change of government in two years’ time, an incoming Labour Government would face the same fiscal challenges and may well stick with the existing plans to address them, as they did on electoral victory in 1997 through continuing with Chancellor Ken Clarke’s spending plans. No doubt they would place even greater tax burdens on ‘those with the broadest shoulders’, but there is no scope for a spending bonanza irrespective of who is in power.”
But Buxton believes that UK equities are already pricing in such a range of negative scenarios, and trade at such low valuations relative to other markets, that relative outperformance is possible in the year ahead.