UK GDP: Continued strong growth numbers - J.P. Morgan Asset Management

UK GDP: Continued strong growth numbers

Contributors Alex Dryden, Global Markets Insights Strategy Team
In brief
  • UK real gross domestic product (GDP) rose by 0.6%, quarter on quarter, in the fourth quarter of 2016—the same rate as the previous two quarters, and slightly above economist expectations of 0.5%.
  • The fourth-quarter figures show that the UK economy grew by 2% in 2016, slightly slower than the 2.2% in 2015, but significantly faster than many economists predicted after the European Union (EU) referendum.
  • The pound strengthened initially against the US dollar before falling by 0.5% on the news. The FTSE 100 jumped by 0.2% and UK 10-year government bond yield rose to 1.5%, its highest level since May 2016.

With the economy growing at 2% and inflation hitting a 30-month high in December, the Bank of England is in a tough spot. In normal times, strong economic growth and higher inflation would lead to tighter monetary policy. However, this is not a normal economic environment, with policymakers still nervous about any delayed impact that the Brexit vote will have on growth. The current account deficit also continues to weigh on the economy, expanding to a record 6% of GDP in 2016. Meanwhile, retail sales in December fell 1.9% (month on month), the biggest monthly decline in nearly five years, suggesting that consumers may be feeling the pressure.

Uncertainty over the UK growth outlook has split financial markets, with investors pricing in a 50% chance of one interest rate increase by the end of 2017.

Although question marks remain over the outlook for domestic growth, investment clarity for UK investors is slowly beginning to improve. Prime minster Theresa May’s Brexit speech on 17 January, as well as the Supreme Court’s ruling that parliament must vote on the activation of Article 50, has provided some guidance on what the UK’s future relationship with the EU may look like, as well as some clarification on the pathway to get there.

Investment implications

For UK investors, we continue to favour UK large cap stocks. The pound is likely to remain weak for the foreseeable future and a stronger global economic backdrop will continue to boost UK-based large cap stocks, which generate 75% of their revenues from overseas. Furthermore, a recovery in commodities is continuing to help the FTSE 100, which has a 25% weighting towards the materials and energy sectors.

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