2018.05: May Economic Review

NOTE: This post is more than 12 months old, and the information contained within may no longer be accurate.

In May, we look at how the UK economy has recovered, after a decade of the financial crisis and the recession that followed. We also focus on investment markets.

UK Economic Growth – 2008 Recession and 10years on . . .

Since 1992, the size of the UK Economy, measured by adding the value of all goods and services produced, had been expanding every quarter. 63 quarters to be exact! However, in April 2008 to June 2008 it started to fall. This continued for more than a year, spanning five consecutive quarters. Two or more consecutive quarters of falling GDP (Gross Domestic Product) is commonly known as a recession.

GDP took 5 years to recover from 2009 back to the size of the economy before April 2008, having shrunk by 6% during the recession. The latest data shows that the UK economy is now 11% bigger than it was before the recession.

Because of the recession, lots of people lost their jobs and employers stopped recruiting. By the end of 2011, almost 2.7m people were looking for work. At 8.4%, the unemployment rate reached its highest level since 1995. Unemployment then began to fall and returned to its pre-downturn rate by the end of 2015. Since then unemployment has continued to fall reaching a record low at 4.3% by quarter 3 2017 before it rose slightly before the end of the year.

Earnings have lagged behind prices for most of the decade since the start of the recession. In the public sector, a pay freeze (from 2011) and pay cap (from 2013) kept wage rises below inflation, while in the private sector wage growth was also slow. There was a two-year period beginning around July 2014 when wages rose in real terms, which was due largely to the fall in the price of oil causing prices to come down too.

However, between November 2015 and October 2016, the pound fell in value by 20%, including a record 6.5% fall between June and July 2016 following the EU referendum. This meant it was more expensive to import goods and services, so prices rose and earnings are again failing to keep up with prices.

So, despite low unemployment, real earnings have barely risen . . .

One way to measure, the strength of the economy is looking at how much money workers add to the economy – their labour productivity, measured in output per hour. Productivity had been rising steadily before the recession, but it slumped in 2008 and has barely recovered since. Had the pre-2008 trend continued, productivity would have been 20% higher than it actually was at the end of 2017.

Lots of reasons have been suggested for this, including banks not being willing to lend to new businesses, low levels of business investment and companies being able to keep staff on instead of making them redundant, because wages have not been rising. Nevertheless, the phenomenon of low productivity growth, common to many economies across Europe, is not fully understood and has been called the “productivity puzzle”.

Source: Office of National Statistics

We believe this gives us an outlook for continuing growth in the short term (12-24 months), although slowing down as we look further ahead, with the risk of more downside risk returning. In the midst of this, is the deal for Brexit. With progress being made, the true impact remains unknown.

Global Outlook

Globally, the IMF recently published its outlook and in summary, reports that the upswing in global investment and trade continued in the second half of 2017. At 3.8 percent, global growth in 2017 was the fastest since 2011. With financial conditions still supportive, global growth is expected to tick up to a 3.9 percent rate in both 2018 and 2019.

Global growth is projected to soften beyond the next couple of years. Once their output gaps close, most advanced economies are poised to return to potential growth rates well below precrisis averages, held back by aging populations and lackluster productivity.

While upside and downside risks to the short-term outlook are broadly balanced, risks beyond the next several quarters clearly lean to the downside. Downside concerns include a possibly sharp tightening of financial conditions, waning popular support for global economic integration, growing trade tensions and risks of a shift toward protectionist policies, and geopolitical strains.

The current recovery offers a window of opportunity to advance policies and reforms that secure the current upswing and raise medium-term growth to the benefit of all.

Source: IMF


Below we provide a table of the major sectors that we allocate to when constructing our client portfolios. The data has been sorted over 1 month in order of best to worst returns. We have shown returns on an annualised basis for 1 year and above.

Sector 1m 1yr Ann. 3yr Ann. 5yr Ann. 10yr
UT UK All Companies Retail TR in GB 6.23 7.41 7.09 8.52 6.87
UT North America Retail TR in GB 4.82 6.45 12.76 14.02 11.07
UT UK Smaller Companies Retail TR in GB 4.74 13.78 14.10 14.24 11.21
UT North American Smaller Companies Retail TR in GB 4.70 6.66 12.74 13.71 12.55
UT Europe Excluding UK Retail TR in GB 3.92 7.45 10.32 10.51 6.51
UT Japan Retail TR in GB 3.40 14.64 13.31 10.81 8.22
UT European Smaller Companies Retail TR in GB 3.24 11.25 15.68 15.32 10.61
UT Asia Pacific Excluding Japan Retail TR in GB 3.23 12.15 10.71 8.90 8.11
UT Property Retail TR in GB 2.14 3.89 4.44 5.70 2.73
UT Global Emerging Markets Retail TR in GB 1.36 11.78 10.00 6.41 5.15
UT Targeted Absolute Return Retail TR in GB 0.79 1.36 1.12 2.26 2.73
UT Sterling High Yield Retail TR in GB 0.56 2.96 3.87 3.81 6.11
UT Global Bonds Retail TR in GB 0.21 0.09 3.52 1.68 4.43
UT Sterling Corporate Bond Retail TR in GB 0.04 1.17 3.23 3.42 5.08
UT UK Gilts Retail TR in GB -1.25 -0.77 3.17 3.06 4.84
UT UK Index Linked Gilts Retail TR in GB -2.50 -4.05 5.24 4.98 6.66

Source: FE Analytics to month end April 2018

UT = Unit Trust, TR = Total Return and in GB = Currency Sterling


Following the market highs seen in January, Equity markets have experienced increased volatility since and those losses during February and March, were reversed in April as Equities posted the most positive month so far in 2018. Conversely, UK Government Bond sectors posted losses over the month and over 1 year.


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26 Apr 2024

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