Is the UK’s glass half full, or half empty?

Ed Monk

Ed Monk - Fidelity Personal Investing

It’s a big week in Westminster as Brexit votes are held which could - but still may not - give a clearer idea of how the UK will leave the European Union.

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More certain is that the Chancellor of the Exchequer will deliver a Spring Statement, updating the country on the state of the country’s finances and laying out forecasts for how it believes it will perform in the months and years ahead.

Unlike the Budget, now shifted to the autumn, the Spring Statement is not regarded as a ‘fiscal event’ - which means it will not include big policy plans or significant changes to tax and spending, although it could be the launch pad for consultations on future changes.

Nevertheless, the Spring Statement will contain important signals on the health of the UK economy right now.

In particular, a downgrade to official forecasts for growth is likely, and could possibly be by a significant amount. The Office for Budget Responsibility previously predicted GDP growth of 1.6% for 2019 and this could be reduced by half, to 0.8%, according to some estimates.

That raises the likelihood that this year could bring quarterly readings of growth that are close to zero. Bear in mind that two consecutive quarters of negative growth is commonly regarded as the definition of a recession.

Weak economic growth is also being accompanied by falling inflation, which now stands at 1.8% a year and below the Bank of England’s 2% target. Low inflation is a double-edged sword - it means households keep more of their money, particularly as wages are growing at a rate of 3.4%, according to the latest reading.

The Spring Statement is also likely to confirm strong jobs numbers, with a record low unemployment rate, which is also good news for workers.

But low inflation also means that the economy may be slowing down as businesses reduce their prices in order to sell to consumers who are increasingly cautious. You can see this in the weak results being reported by retailers, who have been frantically discounting their goods to tempt shoppers - those discounts eventually show up in lower inflation figures.

Slowing growth and inflation also makes interest rate rises less likely, because the Bank of England will not wish to make borrowing more expensive when spending is already weak. Low rates may also help the Chancellor this week when he unveils better public borrowing forecasts - low rates make it cheaper for the government to borrow money too.

Overall, then, the UK economic glass is half full, or half empty, depending on what you choose to look at. The conditions are there for households to become better off with a healthy jobs market, rising wages and low inflation.

Pessimists will point out, however, that these could be simply lagging the overall growth rate, which is weakening, and are likely to get worse in the future if confidence continues to reduce.

For investors it is a time to hold your nerve and be prepared for more volatile days, particular as markets react to Brexit related news. It’s a good opportunity to ensure your portfolio is properly diversified and without too much exposure to the UK, unless that’s what you want. Our propensity to invest in markets and companies closest to us is natural because it makes sense to buy what you know, but the UK only makes up something like 6% of stock markets globally.

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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. 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.