Russell Investments downgrades UK

Wouter Sturkenboom, senior investment strategist at Russell Investments, comments on the outlook for the UK economy and why it has downgraded its UK business cycle score.

At 1.5% to 2% at the turn of the year, our forecast for UK growth was already cautious and decidedly below market consensus.

Our reasons for caution included the negative impact of several headwinds: fiscal austerity, a slowdown in global growth, and risks around the strength of consumer spending.

We now expect growth to come in at the lower end of our range at 1.5%. UK growth is now 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.

Of course, the consumer is a force to be reckoned with. Consumer spending is a large part of GDP.

However, consumer spending, historically, is closely related to the fortunes of the housing market.

And 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.

In any case, we can’t expect consumers to carry all the weight even if they are able to maintain spending. More caution is therefore warranted.

Downgraded UK business cycle score

The choice around Britain’s membership of the European Union is much more about the long-term benefits versus the long-term costs of EU membership.

Due to the risk and the uncertainty the referendum entails, we have downgraded our UK business cycle score.

We expect 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.

Against this backdrop we are maintaining our underweight in UK equities.

Fixed income investors should keep their expectations low with respect to gilt yields.

Without the BoE hiking rates and without a big rise in inflation, we expect the yield to move within a relatively narrow range of 1.4% to 1.9%.

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