The UK looks set to grow at a modest pace this year. Its outlook is influenced heavily by the interaction between the fundamentals, policy and confidence.
Confidence is always hard to predict, no more so than now, as the world economy slows and the domestic political crisis persists.
The fundamentals, meanwhile, are mixed. The UK is an imbalanced economy, for reasons unconnected with Brexit, whether it be a lack of housing, low investment or low productivity.
Resilience enabled by a flexible economy
Yet, despite politics, the UK has demonstrated remarkable resilience since the 2016 Referendum. Perhaps this is not surprising, as previous supply side reforms have led to a flexible economy, able to adapt well to shocks.
This is reflected best in the jobs data. Employment has risen by one million since the Referendum, with full-time jobs up significantly over the last year. Wages are rising. With inflation subdued, this should underpin consumer spending.
Uncertainty, however, has dampened investment. Yet the UK is still a huge recipient of inward investment and intangible investment may not be reflected fully in the data.
Policies likely to support the domestic outlook
While it is clarity over Brexit that is sought, the other aspects of policy are likely to support the domestic outlook. There is no need for premature monetary tightening, as inflation remains low. Meanwhile, the fiscal dynamics look good, highlighted by the steady reduction in the budget deficit.
Indeed, as nominal GDP grows steadily, there is the potential for the debt to GDP ratio to fall significantly in coming years. This will allow the government to relax its fiscal purse strings, further helping demand.
One hallmark over the last decade has been unconventional monetary policy globally. Do not be surprised if we enter a phase where the case is made globally that there is more fiscal space available, too.
An attractive long-term opportunity?
Sterling is one shock absorber for the UK’s ongoing political crisis. Thus, a large risk premium has already been factored into UK assets. It is premature to say sterling has hit bottom even though it is already at a competitive rate. Little wonder some long-term investors may view this as an attractive opportunity.
Please remember that when investing your capital is at risk.