The state of the economy is much more positive than the gloomy prognosis implied by market valuations
Incoming macroeconomic data in recent weeks has reaffirmed my view: regardless of what you may have read or heard, the UK economy is doing just fine.
Much has been written over the summer, in particular, about the consumer debt burden and its implications for future monetary policy and growth. I am less concerned about this, partly as a result of the low interest rate environment, which I expect to prevail for some time.
The recent inflation data, and the Bank of England’s response to it, do not change this view. Clearly, the probability of an interest rate rise in the near future has increased but I do not believe this heralds 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.
Consumer debt levels are manageable in the context of household incomes. Furthermore, as chart one illustrates, it is evident that the growth in debt we have been seeing over the last 18 months has not 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 to suggest worries about consumer debt are overdone.
Meanwhile, recent revisions to the way the national accounts are calculated, should also diminish the level of these concerns. Figures released by the Office for National Statistics last month, for example, suggest UK household savings have been running at a much higher level than had previously been estimated.
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 the UK economy has remained resilient in 2017, despite predictions the Brexit negotiations would precipitate a collapse in activity. That never seemed likely to me and the data, thus far, is supportive of this view.
Indeed, recent data – robust retail sales, better-than-expected public finances and a decent pick-up in housing transactions, for example – 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.
I 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 my long-term investment strategy. This is clearly not a popular position but that is exactly what attracts me to it. Some of the biggest valuation opportunities I have embraced in my career have been in contrarian calls, where market participants have deserted a particular part of the market for reasons which do not add-up from a fundamental perspective.
I believe we are seeing the same play out now and, as the evidence that the UK economy is in better shape than many have expected continues to mount, I am absolutely confident the outcome will be the same as it has been in the past.
Neil Woodford is head of investment at Woodford Investment Management