The following is a commentary on today’s UK Q4 GDP figures from ETX Capital, a spread betting provider in London.
After the stunning albeit distorted Q3 GDP figures last year, today’s disappointing Q4 growth figures are a stark reminder of the poor condition of the UK’s economy and the difficulty it will have to find the path of sustainable growth in the years ahead.
Today’s report raises big questions over the prospects of the UK in 2013, both on an economic and political level. Economically, the zero or no growth environment means continued liquidity activism by the Bank of England for the foreseeable future but also dents consumer confidence to the point where businesses in the UK will see a considerable hit to their profits.
The barrage of bad news out of the UK only reaffirms to consumers of how unattractive the environment is in UK, prompting consumers to hold back from departing from hard earned cash and investors to look elsewhere in order to book favourable returns on their investment. This is worrying for the business sector as the decline in consumer activity will ultimately eat away at the bottom line for some time to come.
Politically, expect increased disillusionment over the current austerity measures undertaken by the coalition government. The UK’s economy continues to contract, three years after the end of the first recession which indicates that the government’s current measures are clearly not working.
This week, UK Prime Minister David Cameron’s pledged for a referendum on Britain’s membership in the European Union if he is elected again. If the UK does indeed exit the EU, the economy will enter a low growth environment and suffer from a further lack of investment and overall reduced competitiveness. That means more pain in the years ahead.
So what’s the likely outlook for the UK economy this year? More stagnation with the economy dipping in and out of contraction until the BOE decide to pump more liquidity and the UK government takes stronger action in order to spur economic growth. Rating agencies will now show no mercy and will most likely strip the UK of its triple-A rating in the weeks ahead but as their forthcoming actions are well-flagged, the response in the market could be muted.
There are reasons to be optimistic this year for a gradual improvement in 2013 and beyond. Encouragingly for the UK, a regaining Chinese economy, strong recovery in the US and Europe finally turning a page by moving out of crisis mode does bode well for large UK corporates with solid global footprints. The softening of sterling boosts the UK’s competitiveness and the Bank of England’s currently policies are still easing credit conditions. UK businesses have also deleveraged since the crisis of 2008, ramped up cash-reserves and are generating jobs; these are the bright spots that financial markets are currently focusing on.
The UK’s FTSE 100 index last year underperformed European peers, registering just a gain of around 6% in 2012 versus near 30% gain for Germany’s DAX. At present, the UK index is trading near its highs for the year, barely unaffected by the poor GDP numbers and firmly above the 6250 level. So despite the low growth environment in the UK, investors clearly still see value in the market and will continue to do so during the year.
UK GDP to Dec 2012 = click to enlarge
