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Home Economic Fundamentals UK Economic UK economy storm ahead: Weather, the VAT rise and the looming election
UK economy storm ahead: Weather, the VAT rise and the looming election PDF Print E-mail
UK Economic
Written by Sam Coventry   
Wednesday, 24 February 2010 11:19
Barings Asset Management warn that 2010 will be a slow one.
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On Friday the UKs GDP figures are expected to be revised higher, but beyond Friday, economists and analysts aren't expecting much good news.

The evidence that 2010 is going to be a tough one continues to grow.

Today Baring Asset Management’s released their latest global economic research which reveals that the UK economy is to face tough headwinds.

"In the short-term the economy has to overcome the impact of the weather, the VAT rise and the looming election.  After the election, pressure for budget cuts and a coherent medium-term financial plan will become intense and backed by a non trivial risk of a rating down grade,” warns Percival Stanion, Head of Asset Allocation at Barings.

However, according to Barings, the impact of weaker sterling will help to mitigate some of the listed ailments.

“Last year, the UK did not get much benefit from a 30% fall in trade weighted Sterling, though that is probably due to the recession causing an indiscriminate hacking back of orders. It will help this year," says Stanion.

Global pressures


The UK will not be helped either by the added pressure that comes in the form of a poor eurozone and a US economy that continues to struggle.

The US recovery is still well below ‘normal’ for the current point in its economic cycle.  

A report by Barings, issued today, warns that the economy still has to pass several key tests to prove it can stand on its own feet as the authorities withdraw support.  

For example, the auto sector has proved resilient following the end to the ‘cash for clunkers’ programme, but now the test will be how it performs when the Fed ends quantitative easing.

Also, mortgage rates are expected to rise by 25-50 bps and the impact this will have on the housing sector will be followed carefully.  Similar arguments apply to the employment situation – layoffs have eased back but there is little sign of job creation.  

Then there is Greece. “The Greek crisis is a key test of European nerve.  There is huge pressure now being exerted to force Greece to raise taxes and cut public sector salaries.  

"This is the only way the country can restore some competitiveness and control public debt levels.  But it will be painful politically to force these measures through.  Once Greece has accomplished this, attention will then turn to Spain, a far larger economy and where there is the added complexity of regional autonomy.  Activity in both countries and Ireland will almost certainly still be down again in 2010,” says Stanion.

And what does this mean for investors?


“In market terms, worries over Chinese growth plus the tensions over Greek sovereign bonds have been the catalyst for some significant profit taking, the first since the rally began last spring.  Certainly investors have cause for concern as risk assets (equities and corporate bonds) are no longer cheap after the huge rally.  

"Equities have achieved fair value on the assumption of a huge recovery in margins and earnings.  This is probably justified given the cost cutting achieved recently, but there needs to be more visibility of the resilience of global growth, particularly with the prospect of government support being withdrawn for markets if valuations are to be pushed to new higher levels. We remain positive on equities for the long term but cautious in relation to bonds and cash,” conculdes Sanion.



Last Updated ( Wednesday, 24 February 2010 11:21 )