This week’s weather is an unusually apt metaphor for the UK’s economy. Torrential rain on Monday was replaced by some lovely sunshine yesterday but the wellies and umbrellas are out again today.
The meteorological ups and downs are a pretty good analogy for this week’s string of economic data releases which have underscored the challenge faced by the Bank of England in setting a suitable monetary policy for an economy that’s apparently running both hot and cold at the same time.
The bright spot in the UK economy at the moment is clearly the jobs market. Yesterday’s employment data from the Office for National Statistics showed household earnings growing at 3.9% excluding bonuses and 3.7% including them. That was a bit better than in the previous month and wages have not been growing at this level since before the financial crisis a decade ago.
The bad news is that, adjusted for inflation, salaries are on average still lower than they were back then, but they are clearly heading in the right direction as spare capacity is used up and employers are forced to pay up to fill their vacancies. The proportion of the workforce in employment in Britain has not been this high since 1971.
Look elsewhere, however, and the picture does not look so bright. The most recent GDP data showed a fall in economic output in the three months to June, down by 0.2% compared with the previous quarter.
You have to take care with drawing too many conclusions from just one set of data because there are invariably plenty of caveats. And the latest GDP numbers are no exception.
In particular you have to take in to account the fact that the first quarter’s activity was a bit better than might have been expected thanks to the desire of many businesses to get ahead of the Brexit game and build inventories before the first deadline, on March 29th, for Britain to leave the EU.
Bringing forward production and purchases into the first quarter pushed GDP growth between January and March to 0.5%, a bit higher than implied by the overall health of the economy. Against that comparison, the second quarter was always going to look more difficult.
The new Chancellor of the Exchequer, Sajid Javid, was quick to point out that the rest of the world also slowed down in the second quarter so part of the reduction in GDP was unavoidable. Fair enough. But it’s worth noting that the UK did worse between April and June than its major competitors in places like the US and Germany.
Which brings us to today’s data, which showed a modest uptick in inflation to just above the Bank of England’s 2% target. The consumer price index rose by 2.1% in July as prices of accommodation, clothing, footwear and financial services edged higher offset by reductions in the cost of transport and fuel.
This is the confusing backdrop against which the Bank’s monetary policy committee is tasked with setting interest rates. And it’s an unenviable job.
On the one hand, a falling pound is starting to raise the cost of imported goods, adding to the inflationary pressures of a strong jobs market. On the other, businesses are loath to invest while Brexit remains such a major unknown.
The Bank is now starting to suffer from its inability to follow the US on a path to monetary normalisation over the past four years. The Federal Reserve may have preferred to get interest rates a bit higher than just under 2.5%, but the Bank can only look on with envy at the flexibility that provides the US central bank. With rates at 0.75%, the Old Lady has minimal firepower to fend off a Brexit-related recession.
Where does this leave investors in the UK markets? In a quandary, is the short answer. On the one hand, British shares are cheap because investors have found London an easy market to ignore since the EU referendum in 2016. The dividend yield of Britain’s leading shares is a particular attraction for investors in a low-interest-rate environment.
On the other hand, however, the ongoing slowdown, with the risk of worse to come if we do end up with a No Deal exit in October, provides a compelling reason to steer clear of UK shares. This is particularly the case for overseas investors who also have to assess whether the pound has further to fall.
With so much uncertainty, now is not the time to be making bold calls on individual markets or asset classes. A broadly-diversified portfolio that includes shares, bonds and commodities such as gold makes sense today. As does balancing an exposure to the UK market with others to developed and emerging markets around the rest of the world.
The Select 50 list of our favourite funds covers all of these assets and geographical regions so it’s a great starting point for investors who prefer to select their own investments.
If you want an expert to do it for you, the Select 50 Balanced Fund might be worth a look. Managed by experienced multi-asset investor Ayesha Akbar, this is a one-stop fund that aims to deliver growth without too much volatility. That combination has rarely seemed more attractive.
More on investing in uncertain times
Important information The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.