UK Economy - scope for optimism?

This short piece comes from the Woodford Fund. It provides some clarity on three important areas; consider the charts, and how you might incorporate this information into an essay:

UK ECONOMY – DEFIANT GROWTH
Mitchell Fraser-Jones, 20 September 2017

Much has been written over the summer about the consumer debt burden and its

implications for future monetary policy and growth. We are less concerned about this, partly

as a result of the low interest rate environment which we expect to prevail for some time.

The recent inflation data, and the Bank of England’s response to it, don’t change this view.

Clearly, the probability of an interest rate increase in the near future has increased but this

does not, in our view, herald the start of meaningfully tighter monetary policy. Indeed, the

stronger pound that has greeted the recent policy rhetoric, ironically does much to counter

the inflationary forces that prompted the talk of rate hikes in the first place.

We believe consumer debt levels are manageable in the context of household incomes.

Furthermore, as the chart below illustrates, it is evident that the growth in debt that we have

been seeing over the last eighteen months hasn’t really been the result of a pick-up in

consumer borrowing – it is corporate borrowers that have been taking advantage of the

renewed appetite for lending in the UK banking sector.

And, in the context of recent history, although the rate of debt growth has increased as the

banking sector has rehabilitated itself, it remains modest compared to the rates of growth

seen in the early years of the new millennium. Further evidence, as far as we’re concerned,

to suggest that worries about consumer debt are overdone.

Meanwhile, recent revisions to the way that the UK’s household savings ratio is calculated

should also diminish the level of these concerns. Figures released by the Office for National

Statistics last month suggest that UK household savings have been running at 8-10% in

recent years, compared to previous estimates which fell to c. 5% last year. Admittedly, the UK savings ratio has still been on a downward trend, as one might expect in a period when the value of other parts of the balance sheet, such as equities and, most households’ primary asset, the house itself, has been rising. The pace of the decline in savings, however, has been much less sharp than previously estimated.

Overall, official data confirms that the UK economy has remained resilient in 2017, despite
predictions that the Brexit negotiations would precipitate a collapse in activity. That never
seemed likely to us, and the data, thus far, is supportive of our view. Indeed, recent data,
including today’s better-than-expected retail sales numbers, suggest a modest improvement
in economic activity in recent months which, alongside renewed growth in money supply,
bodes well for UK GDP growth in the second half of 2017 and beyond.

We remain positive on the outlook for the UK economy – much more positive than the
gloomy prognosis implied by market valuations – and that is reflected in our long-term
investment strategy. The evidence that the UK economy is in better shape than many have
expected, continues to mount…