Fisher Investments Editorial Staff
Developed Markets, GDP

British Pop

By, 04/12/2012

In recent months, the US, eurozone and China have dominated global economic chatter. That’s understandable, considering those areas account for nearly half of global output, but as we wrote yesterday, focusing on a handful of nations overlooks some interesting, even encouraging, developments elsewhere.

Take the UK: 2011 was tough for our friends across the pond. Annual GDP grew only 0.7% (and contracted in Q2 and Q4), inflation passed 5% after a VAT hike, and many feared a flagging eurozone and domestic fiscal tightening would tilt Britain into recession. There were also bright spots throughout. Wages and salaries rose each quarter. Total trade—exports and imports—though volatile, grew on balance over the year. Firms stayed profitable, matching 2010’s net rate of return. Business investment, after a rocky start, ended up positive. And even as GDP contracted a bit in Q4, household spending rose. Coupled with rising exports and imports at year end, that suggested demand remained firm despite the headline contraction, perhaps supporting a near-term rebound.

A smattering of recent data further suggest the British economy is healthier than many presume. March manufacturing and service PMIs expanded and accelerated from February. March retail sales grew a robust 3.6% year over year, beating expectations for 0%. That followed February’s 2.3% y/y retail advance—together, evidence 2012 is off to a better start than 2011. Permanent job placements are also up in the year’s first three months (temporary placements fell, but this seems more due to EU regulatory changes than British fundamentals), suggesting improving employment may be in the offing. Add in an accommodative BOE, £750 trillion in cash on British non-financial corporate balance sheets and pending drops in corporate tax rates, and there’s a lot to like about the UK’s economic prospects in 2012 (the English football team’s prospects for Euro 2012, sadly, may be another story).

Of course, that’s not to say all shall be easy-peasy from here—challenges exist, as they always do. In Britain, one big challenge is bank lending. Loan growth, especially for small businesses, was tepid at best in 2011 despite a government program, Project Merlin (which turned out to be less than magical), aimed at increasing it. Many firms borrow to invest in new equipment, research and development, facilities and the like, all of which can help increase output over time. Muted lending can stifle this activity. Yet officials are taking steps to help turn this around. The BOE increased its asset purchase program in February, adding £50 billion in liquidity. Chancellor George Osborne launched the National Loan Guarantee Scheme in March, which he estimates will reduce small businesses’ borrowing costs by about one percentage point. Osborne also said regulators are considering allowing banks to securitize small business loans, which he expects would increase banks’ willingness to lend. Now, none of these will likely be a fix-all and, like all government intervention, they could prove solutions in search of a problem. But if they work as intended, that’s likely an additional positive.

Overall and on average, even if loan growth doesn’t much accelerate, the positives seem to outweigh the headwinds. In fact, in the OECD’s widely overlooked announcement of their higher 2012 global economic growth forecast, the organization revised up its UK forecast, citing an advancing composite leading indicator in January and February. Funnily enough, the OECD only recently expected a Q1 contraction. Its acknowledgment of recent improvements seems to be more evidence the British economy, while not in rude health, is certainly stronger than most appreciate. This might not translate into outperformance for UK stocks, but it shows even the more maligned corners of the global economy are in better-than-perceived shape, underpinning the notion of a global economy on sound footing.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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