The UK Q4 2015 Overview

Market Update

The UK sits on the same side of the policy divergence dynamic as the US, with its economy relatively strong compared to most of the other developed markets (although its growth slowed over the course of 2015) (Figure 1).


Figure 1: UK GDP growth has been among the strongest in the developed world over the last couple of years, whereas Japanese growth has been relatively weak over the same period.

(Source: Thomson Reuters Datastream)


The performance of the UK’s FTSE 100 Index has been held back by some of its large internationally-exposed and resource-heavy constituent companies. However, the more domestically-exposed FTSE 250 Index has performed much better, reflecting the UK’s positive economic growth (Figure 2).


Figure 2: The FTSE 100 Index continues to suffer as a result of its heavy weighting towards resource-related and globally-exposed companies, whereas the FTSE 250 Index, which consists of more UK-focused businesses, has performed much better in 2015.

(Source: Thomson Reuters Datastream)


This positive growth has underpinned the UK’s relatively strong employment situation. However, the Bank of England (‘BoE’) continues to maintain its supportive policy stance as domestic inflationary pressures have undershot expectations. During the quarter, this led the Governor of the BoE to imply that policy was unlikely to change in the near future, in a reversal of his suggestions earlier in the year that an interest rate rise may become appropriate towards the end of the 2015. In particular, concerns over disappointing wage growth drove this change of tact (Figure 3).


Figure 3: UK wage growth has slowed in recent months, having moved higher earlier in the year as the unemployment rate fell. This is helping keep a lid on core inflation, while UK headline inflation has been dragged lower by the declines in energy and commodity prices, as it has around the world.

(Source: Thomson Reuters Datastream)


The BoE is somewhat uncertain of the reasons why wage growth has been weaker than it had expected, although it has attributed them to a combination of structural and cyclical factors.


On a more positive note, there is likely to be less of a drag from fiscal tightening in 2016, with tax revenues forecast to rise and debt-servicing costs to fall. However, there is also potential for political risk to rise as the ‘Brexit’ referendum approaches, while debt levels in the consumer, corporate and government sectors remain high. All in, the risks to the UK economy remain somewhat balanced in our view.

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