UK economy skating on thin ice with one cylinder firing

April, 2016 Print

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The UK economy is only firing on one cylinder, according to the Russell Investments’ strategy team, while Fathom Consulting described the UK economy as skating on thin ice in a comment on a record current account deficit.

Russell Investments senior investment strategist, Wouter Sturkenboom, commented: “UK growth is now basically firing on one cylinder: consumer spending. Government spending is turning negative, trade is under pressure from the global growth slowdown, corporate investment is weak due to a collapse in earnings, and housing is slowly rolling over.” He added that UK consumer spending is closely related to the housing market, which is now showing signs of slowing down. He added: “In addition, despite unemployment being very low, wage growth has decelerated lately. More caution is therefore warranted.”

Looking at recent UK data, including a record current account deficit, a fall in productivity in Q4, 2015, of 1.2%, and a record low household savings ratio, Fathom Consulting said that the data suggests that the UK economy is operating above its potential. It warned: “We forecast UK economic growth of 1.8% in 2016 and 1.5% in 2017, assuming that the UK votes to remain in the European Union. However, an ‘out’ vote in the Brexit referendum, a rapid housing market correction, and banking contagion from China all pose downside risks in our view.” Russell Investments also said that the uncertainty over Brexit would reduce activity in the UK economy in the short term.

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