It’s been a week of mixed headlines with Russia announcing approval of a vaccine as the UK meets the definition of recession amidst rising unemployment. The first week of Eating out to Help Out saw it used 10.5m times although the Treasury estimate the average value to be just £5 of the capped £10 contribution. As a complete aside, it was pleasantly reassuring to see children getting onto school buses this week. The simplest things…..
Leaving the tragic rail accident in Aberdeen to one side along with the fiasco over exam results the media focus this week has been on UK recession doom and gloom. This follows two consecutive quarters with negative GDP (the technical definition of recession) and the Bank of England’s forecast last week that the economy is to shrink by 9.5% this year. In many respects this is old news that has been widely expected and already accepted by financial markets. The bank also forecasts 9% growth next year returning the economy to it’s pre-Covid’ size and 3.5% growth in 2021. However, with the end of furlough in sight the media focus appears to be on rising unemployment rather than, for example, the increase in advertised jobs this week by 125,000 to 1.1m. While much of these are relatively low skilled jobs, that’s also where we understand many of the redundancies are. It feels like the old adage of bad news selling papers perhaps holds some truth.
Unemployment data is an overtold story highlighting the effects of the lockdown recession but the story’s moved on. It’s now about how quickly we can build on the recovery to date. Last night when the FTSE100 closed it had gained nearly 1.7% this week which seems far more newsworthy and relevant to investors than poor unemployment data.
This also emphasises the disconnect between GDP and financial markets. The reason for this is primarily that financial markets are looking through the short term news flow to the medium term forecasts. Take the Bank of England forecast last week which, to paraphrase, basically said this year’s terrible but we’ll be back to normal by the end of next year. It wasn’t an investment manager trying to sell his investment strategy with a positive spin in the outlook, it was the Governor of The Bank of England. In other words, it’s a credible, respected view. The market reaction to GDP data was therefore negligible as the focus (and valuation basis) has moved swiftly on to recovery and where we expect to be at the end of next year.
In the US consumption has surpassed on the upside in the short term but is likely to slow until another round is stimulus measures are agreed. In Europe the lifting of restrictions and opening of borders has meant some upside surprises following the fiscal response of €750bn joint debt agreed last month and a second wave of more traditional measures, such as tax cuts and spending, is expected to follow.
It seems the UK faces more challenging conditions. UK GDP is estimated to be down almost twice that of the average in the industrialised world, arguably reflecting a high dependency on our domestic consumption. On the upside there is plenty of evidence that recovery is underway but the threat of increased unemployment, revolving localised lockdown restrictions and a hard Brexit means GDP growth could lag for some time. Given that some 70% of FTSE100 earnings are overseas (another reason the index is not representative of the UK economy) it seems likely the disconnect between the UK financial market and economy (as measured by GDP) will continue albeit the headlines may lean towards the latter. This feels like an important point for investors to bear in mind against the likely news flow in the coming months.
Hopefully that sets a reasonable tone ahead of weekend newspaper reading and for the most part it looks as this could take place in the garden with continued good weather forecast. On that note, have a good weekend.
Regards
Kenny