FOR much of the post-crisis period, the UK economy has been a popular target for the economic doom-sayers, seemingly the poster child for many of the most heinous economic crimes of the current era.
In no particular order - there is too much debt, the financial services sector plays too dominant a role, productivity seems to be in terminal decline, while the economy is saddled with administrations that have persistently failed to grasp the role of government spending in a weaker economic environment.
We’ve long suspected that such pessimism is misplaced with regards to the UK economy. Reasonably recent history told us that cuts in government spending could easily coincide with strong, even stronger, growth in the private sector, much as it did in 1981.
The productivity debate, meanwhile, may just lean too heavily on statistics that struggle to bear the weight – we are simply better at measuring employment and hours worked than we are at judging output. This may be even more the case in an economy increasingly dominated by the services sector.
Alongside this, it is worth remembering statisticians often struggle to keep up with the reality in an economic upswing, missing some creation of new small businesses. The last few years have already seen significant positive revisions to the UK’s recent output history, already sufficient to change the way we view the recovery of the UK economy from the great financial crisis.
Even if we do believe the current data on output per hour worked, a large part of this productivity puzzle can be explained by a more robustly capitalised financial services sector and lower oil prices hitting North Sea oil production. These may be good problems to have with regards to the sustainability of the current economic upswing.
The themes playing out in the UK economy right now are emblematic of those in the wider developed world at the moment. There remain plenty of risks, not least the ever present ‘unknown unknowns’ where diversification across asset classes and geographies is still the best protection. Within such a diversified portfolio, we still recommend a strong leaning towards cash, where nominal values will remain stable.
However, the most visible potential bumps in the road ahead relate to the approach of tighter monetary policy in the US and UK. The re-emergence of some inflation amidst that expected acceleration in growth in the second half of the year may well see bond yields move higher across the curve.
Sudden jumps in yields may well see risk appetite suffer in other corners of capital markets. We still suspect that such bumps will be temporary in nature as we still see this economic cycle having some juice left for the private sector squeeze.
This suggests that equity market returns across the developed world will still be dominated by continuing profits growth on a 12-month view, even if the tactical ride becomes significantly less comfortable for investors.
:: Jonathan Dobbin is head of wealth and investment management NI at Barclays. He can be contacted on 028 9088 2925 or email jonathan.dobbin@ barclays.com
