Allianz unit says UK consumers more challenged now than in crisis

British consumers face greater challenges now than in the recession of 2008, when oil hit $146 a barrel, according to RCM’s Jeremy Thomas.

Speaking as today’s UK Budget downgraded 2011 economic growth forecasts to 1.7%, Thomas said the Chancellor of the Exchequer George Osborne was “constrained to some minor concessions for the UK’s ‘squeezed middle’ consumer”.

Independent forecasts predicted 2.1% GDP growth for 2011.

Osborne was restricted in how much he could offer in the Budget, in part because of his commitment to eliminate the structural deficit during this parliament’s term, Thomas said.

RCM’s chief investment officer for UK equities added: “In many respects the challenges facing the UK consumer are greater now than in 2008, when the economy was gripped by a deep recession and the oil price touched $146 a barrel.”

RCM is a $150bn active asset manager within Germany’s Allianz Global Investors.

“Interest rates cannot be cut further and, due to the weakness of the currency, oil prices in sterling terms have returned to previous highs. The pressure of higher commodity prices raises the probability of interest rate increases from the Monetary Policy Committee this year,” Thomas said.

In further troubling news for the UK, minutes from the Bank of England published today showed its governor Mervyn King believes inflation could hit 5% on the back of rising commodity prices and inflation expectations.

The CPI index is already registering 4.4% growth, above expectations, while RPI is at 5.5%, the highest since 1991.

“The pressure of higher commodity prices raises the probability of interest rate increases from the MPC this year.”

Thomas said high inflation meant trouble for state benefits and payments, linked to inflation. “Today’s Budget highlights that although tax receipts have been better than originally forecast by the Office for Budget Responsibility, higher costs and lower expectations for economic growth mean government borrowing will not fall as fast as previously hoped.”

The UK share market had anticipated this, he said, and UK consumer stocks “have been woeful performers in recent months”.

“This will be a chance for long term investors to buy good franchises at terrific prices,” Thomas said.

David Walker

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