4th April 2016
The GDP growth forecasts for the United Kingdom are too high with the country over-reliant on consumer spending which is turn over-reliant on the housing market says fund firm Russell Investments.
Wouter Sturkenboom, Senior Investment Strategist at Russell Investments, comments: “Since the beginning of 2016, both the GDP growth consensus and the Bank of England forecast have come down, but we still think they are too high. We now expect growth to come in at the lower end of our expectations at 1.5% for 2016, versus the Bank of England forecast of 2.2%.”
Consumer spending alone cannot be relied upon
Sturkenboom says: “UK growth is now basically firing on one cylinder: consumer spending. Government spending is turning negative, trade is under pressure from the global growth slowdown, corporate investment is weak due to a collapse in earnings, and housing is slowly rolling over.
“Although consumer spending is a large part of GDP, it is closely related to the fortunes of the housing market. With London coming off the boil and construction slowing down, we see the first signs that the market is about to turn negative. In addition, despite unemployment being very low, wage growth has decelerated lately. More caution is therefore warranted.”
UK equities look cheaper after selloff, gilt yields expectations revised lower
He adds: “Following the equity market volatility in January, we have revised our UK equity valuations from 0 to +0.5. They appear slightly cheap in an absolute sense and outright cheap relative to the U.S. However, despite this we maintain an underweight due to weak growth and a challenging corporate earnings outlook.”
“For government bonds, we have lowered our expectations for the 10-year gilt yield at the end of 2016 to 1.5% – 2.0%, down from 2.0% – 2.5%. The slowdown in global growth, lower inflation, and the cut in our expected rate hikes in the U.S. from four to two are the drivers behind this change.”
Uncertainty of EU referendum to weigh on the pound
“The risk and the uncertainty created by the EU referendum means we have decided to cut our business cycle score for the UK from -0.5 to -1. The uncertainty will weigh primarily on the pound and, to a small extent, on UK equity markets. For the gilts market the situation is more balanced, with lower foreign demand pushing yields up and lower expected growth and inflation pulling them down,” he adds.