European Economy Back in the Zone
Our views on UK growth, a triumphant eurozone and a potential US rate rise
3 min read
Don’t be too gloomy about the UK
An official UK economic growth forecast has been slashed for this year from 2% to 1.5%. Financial watchdog the Office for Budget Responsibility cited “the persistence of weak productivity growth” as a key reason. The organisation also predicts growth will slow to 1.4% next year and 1.3% in 2019.
But the country’s GDP stayed on track in the three months to September. UK economic growth was up 1.4% compared to the same period last year, in line with expectations. This was largely driven by consumers as spending on cars rebounded in the third quarter and household spending rose at its fastest rate in a year.
While UK equities remain vulnerable in the face of uncertain Brexit negotiations, we believe they are supported by the robust global economy. We have a broadly neutral exposure to UK equity which mostly includes high-quality large-cap companies with significant overseas earnings – making them less dependent on the domestic economy. The FTSE 100 generates about two-thirds of its revenue from outside the country.
Our preference for other markets such as Europe and Japan means this week’s low-key UK Budget won’t have a big impact on Coutts portfolios and funds.
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Business is booming in the eurozone
Purchasing Managers Index (PMI) data for the eurozone reinforces the strength of its economy. The index, which is based on a survey of around 5,000 manufacturing and service sector companies, shot up from 56 in October to 57.5 in November – putting the economy on course for its best quarter since the start of 2011.
This economic success is so strong it should not be hit too hard by the current political uncertainty in Germany, as we start seeing new attempts to form a coalition government. Friday’s rise in the German IFO index to a new record high confirms that business sentiment has been broadly unaffected by political developments.
Europe is among this year’s best performing markets in sterling terms, and our longstanding preference for European equity continues. We believe there is still room for prices to rise, as the pick-up in economic activity supports consumers, corporate activities and new capex investments. At the same time the European Central Bank has indicated that any monetary tightening will be gradual.
US rate rise still on the cards
The minutes of the US Federal Reserve’s latest meeting show that a rate rise this year is still on track.
Policymakers are still mystified as to why inflation remains weak despite unemployment being at its lowest level in years, but many of them still think interest rates need to be raised in the “near term”.
Generally, US economic growth remains solid and continues to drive positive economic momentum worldwide. The US economy is expanding slowly but steadily, the manufacturing sector is in good health, consumer and business confidence is riding high and interest rates remain low.
A rate rise would potentially benefit the Financials sector, which is a key element in all our portfolios and funds reflected through our credit and equity positions.
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