Following the financial crisis, there was a lot of talk from policymakers about rebalancing the UK economy. Unfortunately, this has not materialised and the UK economy remains unbalanced and the nature of recent economic growth is unsustainable.
UK households are saving less now than any other time since the mid-1960s. Currently, the average household saves less than 4% of its income per year. Although we are a consumer economy, it stands to reason that a higher savings rate would be a positive step towards a more balanced economy, one that would be capable of delivering long-term prosperity (not least because theoretically savings should equate to investment).
Upon emergence from the financial crisis, it was widely acknowledged that the UK savings rate was too low and despite considerable talk about the desire for a higher rate in order to reduce the UK’s vulnerability to shocks in the future, this clearly has not happened.
Secondly, house prices – which were never fully corrected in the aftermath of the financial crisis – have begun to rise again, but with incomes barely growing, the valuation of housing is increasingly stretched. This unsustainable situation is now very close to the levels it reached just before the financial crisis.
Third, the current account deficit is also at an all-time high, representing approximately 5% of UK GDP. We have a service surplus, but the amount of goods that we import has never been higher and once again, policymakers talked extensively about the need to reduce the UK’s dependence on a few service-based industries and rebuild the economy’s industrial manufacturing and export base. Sadly, this simply hasn’t happened and UK industrial production is now officially back in recession.
The UK economy has been stronger than we had expected in recent years and has been growing at a moderate pace relative to global growth. However, this unbalanced progress has been driven by unsustainable forces and an excessive reliance on consumption. Usually, if an economy becomes as unbalanced as this, something has to give.
Consequently, a weaker outlook is expected for the UK economy, this does not explicitly mean a recession, but a period of slower growth, one that is not necessarily dependent on the outcome of the referendum (the economic implications of Brexit would need to be considered on a much longer-term basis).
As such, many portfolios are positioned with weaker domestic growth in mind, with investment strategy driven by a global perspective rather than a local one.
I work with all my clients on an individualised basis to ensure that their investments consider these important factors.