UK growth: half full, or half empty?

Ed Monk
Ed Monk
Fidelity Personal Investing22 January 2018

A clearer picture of the health of the UK economy should arrive this week as growth figures for the final three months of the year are released.

On Friday the Office for National Statistics will publish its preliminary estimate of gross domestic product. The headline figure can change as the second and then final readings are released in the months ahead, but Friday’s number should tell us broadly whether the UK improved last year on its annual performance of 1.8% in 2016.

A Treasury poll of economists suggests that they believe the UK performed slightly worse, with 1.7% GDP growth in 2017 the consensus view. If that is confirmed, it will underline the finely balanced point at which the UK economy finds itself.

On the one hand, growth is slowing, and is lower than other developed economies. The downgrades to forecasts that accompanied November’s Budget suggested the UK is entering a period of consistently sub-par performance.

On the other, growth of 1.7% is hardly cause for panic, and is significantly better than the dire predictions made by those who assumed the vote to leave the European Union would usher in a prompt recession.

Whether the UK economy is chugging along nicely or about to splutter to a standstill is, then, a question of perspective. It may also be a question of your stance on Brexit, with much of the pessimism towards the UK economy underpinned by the theory that leaving the EU will hurt business.

It has been interesting, therefore, to hear the thoughts of Lord Jim O’Neill reported today. The former Conservative Treasury minister supported the UK remaining in the EU but admitted in an interview with the BBC that the UK could well perform much better in the year ahead than he and others like him had assumed.

He said that, while he still sees Brexit’s impact as being negative - “a really weird thing for the UK to impose on itself” - better-than-expected global growth could easily ensure Britain avoids a painful slowdown. He added that it wasn’t a case of him having changed his mind on Brexit - he said that the UK would be doing better without it - but that more favourable economic weather could mean the UK does just fine despite it.

He cited a recent report from Cambridge Econometrics which predicted UK GDP will be on average 3% lower in 2030 if the UK leaves the EU single market and customs union, saying: “If that's the worst that Brexit will deliver, then I wouldn't worry about it."

The message for investors to take is perhaps that the performance of an economy, particularly the UK’s, is determined in great part by factors beyond its immediate domestic landscape. Expectations in the economist community of the consequence of a hard Brexit are, it is fair to say, negative but it is easy to overdo the pessimism. A hit to the economy may be shown on time, but it could easily be outweighed by the benefits of an improving global economy.

The hard-headed contrarian investor could see the current “half-glass-empty” view of the UK economy as a buying opportunity. Funds aimed at the UK domestic market could be one way to take advantage, and a number from our Select 50 list stand out.

Fidelity Special Situations is managed by Alex Wright with a mandate to seek out undervalued UK companies of all sizes. Many of these are “cyclical” in nature, meaning they do better in periods when economic growth is stronger.

Franklin UK Smaller Companies is a fund aimed explicitly away from Britain’s largest companies and toward those companies that can grow strongly if domestic demand picks up.

Liontrust UK Growth invests in UK companies of all sizes and managers Anthony Cross and Julian Fosh have a background in smaller companies research which leads them to create portfolios that can differ markedly from their peers.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. The Select 50 is not a recommendation to buy or sell a fund. Some funds invest more heavily than others in smaller companies, which can carry a higher risk because their share prices may be more volatile than those of larger companies. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.