Thought of the day
12.07 - UK shows not all hawks are alike
A decade since the Bank of England last raised borrowing costs, the rate hike debate is at last heating up. The June policy meeting saw a close 5–3 split in favor of keeping rates on hold. Since then, two of those dovish voices (the BoE governor and chief economist, no less) have indicated the possibility of higher rates.
But while the Bank of England might be gaining enough confidence to raise rates, this week's credit rating warnings from both S&P and Moody's reinforce a rather challenging growth outlook ahead for the UK:
- A Brexit-weakened pound is squeezing UK consumers, with real wage growth falling 0.7% in the year to May, and consumer spending falling 0.3% q/q annualized in June, its fastest decline in four years. Continued reliance on consumer credit growth, which has far outpaced household income growth (see the Chart of the day) seems shaky.
- A competitive boost from a weaker pound (–3.2% and –4.5% vs. USD and EUR respectively since early May), is thus far failing to materialize. Manufacturing sentiment data for June shows export orders rising at their weakest pace in five months.
- Unlike Europe or the US, a tightening tilt from the Bank of England says more about inflation, up 2.9% in May, than growth. And further comments from the BoE’s Broadbent this week show cautious voices remain.
While 70% of earnings come from outside the UK, a slowing domestic economy represents another potential drag on earnings. Along with slowing commodity prices and continued political uncertainty, we anticipate only modest upside to the FTSE 100 Index over the next six months. We expect UK equities to underperform Eurozone equities.