The coming year is likely to be 2013 in “slow-motion” for the FTSE but with more volatility, JP Morgan Asset Management UK and Europe chief market strategist Stephanie Flanders says.
The former BBC economics editor expects UK growth to hit or exceed 3 per cent this year. She also expects equities to offer reasonably strong returns, albeit not as good as last year and with much greater volatility.
The consensus estimate for UK growth of 2.6 per cent – although the Bank of England projects 2.8 per cent – is “a bit too low”, she believes.
“I’d be surprised if we didn’t have a three in front of our number for 2014,”Flanders adds. “We expect 2014 to be like 2013 but in slow motion and not covering as much ground.”
The sudden shock to emerging markets in January had thrown a spanner in the works for all agreed forecasts, which makes her contention of higher volatility easier to argue.
The Bank of England’s woeful unemployment and inflation forecasting is unlikely to change the likely timing of interest rate hikes, she adds.
That is due to the “silver lining” of the plummeting inflation and unemployment rates falling relatively in tandem since the Bank introduced its forward guidance.
Flanders believes rates will not rise till early next year, given the large gap to close between current growth and catching up with the country’s long-term average growth before output fell off a cliff in 2008.
She believes it is possible to recover the lost ground.
If not, that means the global financial crisis was more damaging to the UK economy than both World Wars and the energy crisis of the 1970s – “quite a strong claim”, she says.
But if all the major economic worries that have hung over the world for the past few years dissipate and growth remains flat it will be obvious that the structural damage is indeed that dire.
One persistent piece of economic worry is the current account deficit running at 5 per cent of GDP for the third quarter of 2013.
That is the largest relative quarterly deficit in the past decade, as export growth fails to budge despite a robustly growing economy and the greater competitiveness offered by a devalued pound, Flanders says.
Consumption always leads a recovery, but an improvement in the nation’s trading position is needed soon, especially as the UK’s returns from foreign investment is falling, she says.
“It’s inevitable to hear about an unbalanced recovery at this stage, as investment does take a while to pick up heading into a recovery. But you should be worried about a current account deficit that large.”