2013 Annual Market Outlook – The United Kingdom: treading water

January 25, 2013 Categories: Investment Strategy

The economy in the UK has been treading water for two years now, and is expected to do so for at least another year. Especially in the first half of 2013, continued weakness in the private sector and the ongoing Eurocrisis will keep the risk of renewed recession high, despite austerity tapering off a bit. On the back of an expected uptick in global growth, the second half of 2013 should be slightly better, ending the recession.

At the forefront

Over the last couple of years the UK has been paying the price for its pre-2008 private and public sector debt buildup. Being at the forefront of both the financial crisis and its aftermath has resulted in a very weak economic performance in both absolute and relative terms (see graph below).

Due to its large financial sector the UK experienced a deeper recession than the US and Eurozone, while its early adoption of austerity resulted in the weakest recovery.
In monetary policy, the UK has also been at the forefront, with relatively speaking the earliest and largest monetary expansion. Despite this aggressive stance, the economy has slipped back into recession in 2012. Simply put, monetary policy has been unable to act as a sufficient counterweight to the negative effects of private sector deleveraging and public sector austerity. The Eurocrisis, of course, has also taken its toll.
We don’t expect this dynamic to change much in 2013. In the first half of the year, the private sector will continue to be under downward pressure from weak credit growth, keeping consumer spending and business investment down. The second half of 2013 should be better with austerity tapering off a bit and an expected uptick in global growth led by China and the US.

Projections for the UK

  • Economic growth: The UK policy mix is not expected to change materially in 2013. That means the combination of monetary stimulus and austerity will stay in place, allowing the economy to tread water, but not much else. Both the Eurocrisis and global growth will play an important role in ending the recession and entering a cyclical upturn in the second half of 2013. For now, that means we expect growth over 2013 to be around 1-1.5%.
  • Inflation and interest rates: In a weak economic environment where the monetary transmission mechanism is not functioning properly because of a weak financial sector keeping credit supply down and a weak private sector keeping credit demand down there is little endogenous upward pressure on inflation. Exogenous pressure can come from a weakening of the pound, increases in global commodity prices and tax policy. Currently, we only expect some upward pressure on inflation from food prices, but because there is very little inflationary pressure other than that we do not think inflation will go much above 3% and remains firmly range-bound. By extension we expect interest rates to remain range bound as well with a slight increase in rates expected in the second half of 2013 as growth picks up.

For further insight into what 2013 has in store for global economies, download our latest Global Market Outlook or click on the video to listen to our EMEA strategist Wouter Sturkenboom talk you through the year ahead.


Wouter Sturkenboom – Investment Strategist, EMEA

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