What the Experts Are Saying About the UK Economy

UK GDP ESTIMATE: A triple-dip recession could be on the cards, the UK is edging closer to losing its AAA rating, and yet markets hover around 5-year highs

Holly Cook 25 January, 2013 | 11:23AM

Numbers released by the Office for National Statistics on Friday morning revealed the UK economy shrank 0.3% in the final three months of 2012. Though this is only a preliminary estimate and is therefore subject to adjustment as more data comes through, it represents the fourth contraction in the last five quarters and is worse than many economists had expected. Economic growth was flat in the fourth quarter compared to the same period in the previous year.

Yet despite a consensus forecast of a contraction of 0.1% rather than the 0.3% announced today, the UK stock market remains in positive territory on the day and continues to hover around five-year highs. The implication is that investors are either not surprised by the number or they just don’t care. Indeed, there is a sense in the market that many have drawn a line under 2012 and are looking forward into 2013 with renewed optimism.

The FTSE 100 is currently trading within a few points of its level five years ago and yet this latest estimate shows GDP in 2012 was 2.3% lower than it was in 2007. If ever there was a tangible sign that economic growth does not necessarily equate to equity market performance, this is it.

So what are the experts’ reactions to Friday’s numbers?

In contrast to the market’s sanguine take, initial reactions from economists and investment strategists are notably dour.

“Now that a negative GDP figure has been recorded, there is a significant risk that the UK economy suffers a triple-dip recession,” commented Azad Zangana, European economist at Schroders. A recession, measured by two consecutive quarters of economic contraction, could be on the cards as “Weak underlying economic activity coupled with the disruption of recent poor weather could cause GDP to fall in the first quarter of 2013,” Zangana explained.

As pointed out by many economists this morning, the negative number in Q4 was partly a result of the ‘Olympic hangover’, whereby the boost seen in Q3 faded later in the year, leading to a contraction being recorded in the final months even though the economy was in fact returning to its pre-Olympics trend.

Still, Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, was similarly disappointed. “The UK economy is bouncing along the bottom in the weakest recovery in living memory,” he said. Commenting on the attempts at economic stimulus taken by our American cousins, Greetham added: “The more time that passes the clearer it is that America's gradual and delayed approach to fiscal tightening is the right one. As the IMF belatedly concedes, it is far easier to balance the books when an economy is growing.”

In the UK, Zangana expects the Bank of England to restart its quantitative easing programme within the next few months as the economy continues to disappoint. And today’s numbers again raise talk of when—rather than if—the UK will lose its top-quality credit rating. “Disappointing growth and recent poor public finance numbers suggest the UK will lose its AAA rating in the near future,” Zangana said.

Scott Corfe, senior economist at the Centre for Economics and Business Research is also concerned about the UK’s prospects. “Worryingly, 2013 increasingly looks like another difficult year for the UK economy,” he said, “we think that in some respects it could be more challenging than last year.” Corfe added: “It’s hard to see consumer spending growing significantly, given that household real incomes are being eroded by a rate of inflation well in excess of earnings growth.”

It comes as little comfort, but we’re not the only ones. “The latest leading indicators from France suggest the recession there is set to deepen, while similar data from Spain and Italy also suggest more downside risks”, Zangana notes. Clearly the external environment is not helping the UK’s plight.

But equity valuations are proving resilient. With FTSE 100 companies generating the majority of overall revenue from outside the UK, this might not come as such a surprise, but it does raise the question of whether market participants are being cautiously optimistic or simply blinkered to the risks? Now seems a suitable time to remind investors to tread carefully, whatever the weather.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Holly Cook

Holly Cook  is Managing Editor of Morningstar.co.uk