UK Economy Turns Corner?

01.11.12

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

The UK is officially out of recession. It is still early days, but the economy is showing signs of progress. As this continues, it will lead to improved confidence among businesses,

The UK is officially out of recession. It is still early days, but the economy is showing signs of progress. As this continues, it will lead to improved confidence among businesses, households and investors and help drive longer term growth.

Figures released by the Office for National Statistics reveal that the economy grew by 1% of gross domestic product (GDP) over the third quarter of the year, compared to the previous one.

Over the second quarter it had shrunk by 0.4% and reached nine months of negative growth.

In contrast, the 1% rise was the fastest growth figure recorded for five years.

We need to exercise caution though, since the growth was boosted by one off factors. The extra bank holiday in June shaved 0.5% off growth over the second quarter, so there was a bounce back in the third. Olympic ticket sales then added an extra 0.2% to GDP.

The positive growth figure was therefore expected, but 1% beat most expectations, which is encouraging news.

The 1% growth was driven by the UK?s dominant services sector, which expanded by 1.3% and contributed 25% of the total growth.

Industrial output, which includes manufacturing, grew by 1.1%, its strongest rise since quarter two 2010. This contributed 0.2% to total growth. However the construction sector shrank by 2.5%, wiping 0.2% off GDP.

Separate data released on 29th October by the Bank of England showed that lending to UK consumers rose at its fastest pace in four and a half years in September. Consumer credit rose by ?1.2 billion, the strongest rise since February 2008, while mortgage approvals hit a four month high.

These figures boost hopes that the economic recovery is sustainable.

It is too early to say that the UK economy is out of the woods, but it is showing signs of progress and gathering momentum. This will hopefully pave the way for an ongoing recovery.

The deputy governor of the Bank of England, Charlie Bean, cautioned against being over-optimistic, but believes there is ?reason for optimism? for the economy over the coming period.

The headwinds the UK economy has been struggling against, like the Eurozone, banking system problems and high inflation, are abating somewhat, he said. Household?s real spending power has improved, and although there is still a long way to go for the Eurozone, there has been some progress and the picture is slightly better.

Liberal Democrat deputy leader, Simon Hughes, acknowledged that the bigger than projected 1% growth now needs to continue and that the going will be ?choppy?. ?Of course we are not there yet,? he said, ?of course it is the beginning, but I sense very gently that we are turning the corner and we wouldn't have been able to do so unless we had a secure base for the economy on which to do that.''

The director general at the British Chamber of Commerce, John Longworth, said the news will give many businesses the confidence to invest. However the government needs to do more to ensure an economic recovery is sustainable, he added.

The US

Across the Atlantic, GDP rose 2% over the third quarter, while the US unemployment rate fell below 8% for the first time since 2009. Further positive news in the US is that the housing market continues to show encouraging signs of improvement, which has helped consumer sentiment hit a five year high.

The potential ?fiscal cliff? however remains a concern and potential barrier to further economic recovery. A series of tax reliefs and government spending programmes are scheduled to end in January and would reduce households? disposable income. We will need to see how the next US budget negotiations pan out (and before that how the presidential elections pans out). The current deal, you may remember, was crafted under great duress last summer.

Whether in the US, or UK, or elsewhere, positive economic news should lead to higher levels of confidence. Higher levels of confidence are critical in terms of driving longer-term growth, since they can promote gains in consumer spending, which in turn can lead to better jobs growth and therefore creating a self-reinforcing cycle.

Investors

Positive economic data is good news for investors, but there are some key points to remember. We do not normally recommend that investors react to every bit of economic news, whether good or bad. Rather you would normally be invested for the long term with a suitably diversified portfolio, and leave the day to day investment decisions to your professional fund and wealth managers.

However, those waiting to invest should note that historically markets are forward looking and tend to move higher before the economy does. So waiting until the economy is clearly on an upward path could mean you miss out on market rises.

There are still risks ahead for investors. Whether you look at the UK, US, the Eurozone or further afield like China, uncertainty remains. At the same time though, there may be opportunities ahead for investors.

Strategic asset allocation is as important as ever, if not more so. If you remain broadly invested, with a fully diversified portfolio, you will be in a position to partake in any upsides while having some protection if the risks prevail for a while longer.

Importantly, your portfolio should be designed around your specific objectives, circumstances, time horizon and risk tolerance. Blevins Franks specialises in providing personalised wealth management advice to British expatriates living here in Spain, France, Portugal/ Cyprus and Malta, and could help you review and plan your investments in the current economic climate.

30th October 2012

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.

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