Should Investors Be Worried About Economic Growth?

MARKET REACTION: UK economic growth slowed in the first three months of the year, halving from 0.6% the previous quarter to 0.3%. Does this mean the recovery is faltering?

Emma Wall 29 April, 2015 | 1:12PM
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Emma Wall: Hello and welcome to the Morningstar Series, Market Reaction. I am Emma Wall and here with today to talk about growth in the U.K. is Keith Wade, Chief Economist for Schroders.

Hello, Keith.

Keith Wade: Hi.

Wall: So, we've had results showing that in the first quarter of 2015, growth in the U.K. has slowed to 0.3%, which is half of what it was in the previous three months. What's caused this slowdown?

Wade: Well, when you look at the breakdown, you can see that actually the retail sector was quite robust. So it wasn't in the spending side. It was really coming more from what we call business services, a lot of that linked into the Citi, in the finance side. It's not entirely clear what's caused that slowdown, but that seem to be the main reason.

The other factor as well is that construction was quite weak in the first quarter and manufacturing was fairly flat. So those are really the areas of disappointment.

Wall: Should we be concerned about this?

Wade: Well, not really, because I think that the consumer side is going to remain quite robust. And we are seeing signs that wage is picking up, of course, inflation is very low. So this means we're going to get real income growth this year and that's always a good support for the consumer.

The big unknown is to what extent the election might be affecting the economy because, of course, that political uncertainty is making people think twice about big expenditure decisions. And we have seen a bit of a slowdown in volumes in the housing market, for example, and we don't have the data yet, but it could be that that could affect the CapEx side in the business sector as well.

Wall: And how concerned, in general, should we about quarterly figures because three months in the grand scheme of things, isn't all that long?

Wade: No, it isn't. And I think actually the world that we've been since the financial crisis has shown that the data has been a quite a bit more choppy than it has been before. Prior to the crisis, when we had very strong lending, very strong consumer spending there was always this strong growth going along. Now that growth rates are generally little bit lower, it doesn't take very much actually to tip the economy into quite a weak patch, which is what we've seen in the U.S. as well.

Wall: Of course you did mention the general election that breeds uncertainty. Does that mean that growth predictions for the rest of the year and going forward are difficult to make?

Wade: Well, they are. I mean, first of all, as a result of this GDP number people will probably be bringing down their forecast. But the uncertainty created is certainly going to be something that economists will have to take account of. We have actually shaved our numbers already quite a bit ahead of the GDP numbers as a result of election uncertainty because of those factors that I mentioned earlier about businesses not being able to plan, they'll probably hold back a little bit.

They want to know what tax policies there is going to be. They want to know, for example, what the policy on the energy company is going to be. So these things could cause a delay in expenditure. So we have actually adjusted our numbers already in response to that.

Wall: Keith, thank you very much.

Wade: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.              

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Emma Wall  is former Senior International Editor for Morningstar