The Analysis Comment


Looking forward


The UK economy has recently shown troubling signs, but are they really markers of problems ahead?


Richard Conway Director, JCRA


Bearish views on UK economic prospects are not hard to come by, and last month’s disappointing second-quarter growth numbers will have added to the wall of worry. Viewed in the wider international context, however, the outlook may not be quite as bad as headlines suggest.


UK GDP growth disappoints (again) The first contractionary quarter since 2013. The weakest annual GDP growth since the start of 2018. Manufacturing stalling, business investment shrinking, and the dominant services sector barely treading water. Sterling at lows not seen since the Brexit referendum result. The list goes on. Despite this, UK inflation remains at target


(with pressure on the upside), employment is at record highs, real wage growth remains in positive territory, and we have a central bank that is openly considering tightening policy in the medium term. The government is in spending mode too. It would certainly make for an odd sort of


a recession, this. The current UK experience is a textbook


questions – are increasingly becoming the new normal. The entire German sovereign curve out to


30 years now trades at negative rates of return, a consequence of further falls in bund yields over the last seven days. Swiss savers face an even more acute


situation, with yields struggling to break –0.25% at any maturity and securities with under 10 years to run barely offering returns more than –1.00%. Negative rates, while conceptually difficult


for policymakers and monetary models, are not outrageous in theory. As Bloomberg points out, paying for


The current UK experience is a textbook case for consumption smoothing gone wrong. Firms, households, and even the government were guilty of overly conservative stockpiling in the run up to 29 March


case for consumption smoothing gone wrong. Firms, households, and even the government, were guilty of overly conservative stockpiling in the run up to 29 March. Stock overhangs and surplus supply have weighed on performance since. The broader global growth slowdown will also have had an


impact, although these effects are harder to quantify. Markets saw this coming and the reaction was muted. Gilt yields


fell by just two to four basis points across the curve on the release of the GDP figures. The growth slowdown was indeed well signposted by both the


Bank of England and the Treasury. Perhaps more interesting than these latest GDP numbers is the


medium-term outlook and the market’s view on rates. Negative interest rates – having long been the preserve of economic thought experiments and curveball economics exam


12


a safe place to store your capital is commonplace; depreciation of physical assets, fund-management fees, even the cost of a safety deposit box would not cause investors to bat an eyelid. So too, it argues, with government bonds.


A comfortable middle ground Part of this is a story of supply and demand, with an excess of savers looking for a productive and safe home for their capital. But this is also a story of the outlook for growth. On this level, the UK


performs a lot more favourably. The gilt curve lies about halfway between bunds and treasuries,


which most would agree is a comfortable middle ground. US economic growth is running at a considerably faster pace


than our own and we are some way off the more deep-seated structural issues at play in the Eurozone. Expectations at the Bank of England and the Treasury are for


growth to move back to positive territory by the third quarter, with policy helping to shepherd it along the way and tighten monetary conditions when the time is right. Mediocrity is, in this case, very much adequate, and no


doubt Boris and his aides will be happy with this position. There is plenty more to keep the government occupied before 31 October. CCR


www.CCRMagazine.com November 2019


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52