The UK general election was predicted to be the most uncertain in decades. In the event it was one of the most certain. The run up to the election did affect market outlook particularly with the realistic possibility of a UK government being heavily influenced by nationalist parties. Sterling has soared after the election on the outcome of a majority Conservative government. Sterling made its biggest gains against the US$ in six years breaking the $1.58 mark and its highest value against the euro in seven years reaching €1.40. This represents great value for British holiday makers this summer but also creates difficulties for UK exporters whose products have become more expensive to overseas buyers.
One of the most impressive aspects of the UK economic recovery has been the growth in jobs. Our economy has been a very effective job creator. In the past five years two million extra jobs have been filled while the number of unfilled positions stood at 750,000 at the end of May. Unemployment has fallen over the same period from 8% to 5.5%. Full time jobs account for 75% while those employed on flexible contracts, so called zero hour contracts, are around 700,000 in a workforce of over 31 million.
‘Britain has become an impressive job creator’
There were 202,000 new jobs created in the UK in Q1. Our employment rate now stands at 73.5% the highest since records began, while the total number of people who are currently unemployed is 1.83 million, the lowest for 7 years. Regular pay awards are now growing at their fastest for 4 years. The annual rate of earnings in the private sector stood at 4.3% while the public sector rose by 0.9%.
The largest growth sectors have been professional; scientific and technical services, and the high technology sector. Manufacturing employment remains virtually unchanged while construction jobs are surprisingly slightly down. The modern British economy is very service orientated with overseas sales of service almost as big as manufacturing exports.
Britain has become an impressive job creator much like the US due to a flexible labour market that supports employment and business friendly economic policies. These features will now remain in place for at least the next five years.
As far as UK equity returns are concerned, the FTSE 100 index moved from a 12 month low of 6182 in mid-December to hit a new all-time high of 7103 in late April but has since given up a significant proportion of those gains returning to 6680 in mid-June. The UK index has underperformed many of its global counterparts over the last 9 months largely because the FTSE 100 contains a high proportion of poorly performing mining and energy companies. For example, BP and Royal Dutch Shell were hit by falling oil prices while Anglo American and Rio Tinto were hit by record low iron ore prices. It is for this reason that we remained underweight in the UK over the past six months.
The Bank of England (BoE) Monetary Policy Committee has voted again to keep interest rates on hold but has predicted that any pick-up in inflation at the back end of 2015 is likely to put a rate rise back on the agenda. The current rate of 0.5% has now been in place for six years. The last six years have seen real cuts to the incomes of savers. This has had a particular impact on retired savers living off their interest. Mortgage borrowers have benefited as buying a home has never been cheaper from a credit point of view.
This news was announced just before official figures showed that Britain fell into its first period of deflation for 55 years on the back of energy price reductions and an ongoing supermarket price war. The fact that inflation turned negative is not a cause for concern. We are unlikely to see damaging deflation as has haunted Japan over recent decades as inflation is likely to return quite quickly. Oil prices are now around 35% up on their January US$ 48pb low. Global oil supply has been squeezed so prices can now rise again. Q4 could see the combination of rising oil and commodity prices pushing inflation upwards enough to prompt the BoE Monetary Policy Committee into an early review of interest rates. Therefore enjoy the fall in prices while they last.
The BoE is somewhat less optimistic about recovery in Q2 as compared to Q1 and has revised downwards its projections for UK GDP growth. The new forecasts are 2.5% down from 2.9% in 2015 and 2.6% in 2016. The growth forecast has been reduced because of the rise in sterling and the impact that will have on exports, a fall in house construction, and because interest rates may have to rise a little earlier than previously thought. We still expect UK interest rates to stay as they are until Q3 2016 and even beyond.
The BoE is also concerned that many of the new jobs being created are lower skilled and therefore tax revenues may not yet match the rate of growth in job creation. The BoE is expecting workers to become more productive, higher paid resulting in increased tax revenue. We remain optimistic about UK growth.
Government borrowing fell to £6.8bn in April down from £9.3bn a year earlier. The Office of National Statistics (ONS) revised its estimate for a full years borrowing to £87.7bn which is below the government’s expectation of £90.3bn. While the deficit has been halved in the last parliament it is still one of the largest in the developed world.
George Osborne plans to hold a new Budget on 8th July. He is expected to outline his strategy to eliminate the deficit by the end of 2017 and achieve a budget surplus in 2018/19. Perhaps then we can then start to reduce the overall national debt that now stands at £1.487tr representing 80.4% of our annual GDP and costing us all around £52bn per year in interest payments.
There has been a noticeable increase in bank lending to small business. This is a strong signal that the shortfall of private investment is turning a corner and that credit conditions are improving. Also the number of mortgage approvals made to home buyers has increased amid wider signs of a broader confidence within the UK. In April £7bn of new lending was approved. There was a sharp increase in the amounts savers have deposited into their bank accounts as well as an increase in personal loans. The start of the new tax year in April saw £4.4bn invested in new ISA’s and an annual 4.9% increase in personal loan applications. Borrowers are taking advantage of record low interest rates and the signs of economic improvement.