According to Capital Economics, growth of 2.5% is achievable in 2014, while Fidelity’s Trevor Greetham, director of asset allocation, expects the trend for improving data to continue.
But over at Investec Asset Management, strategist Max King is a little more cautious. He believes investors with too positive a take on Britain’s outlook may have grown “complacent” about the recovery.
Limited lending
Admittedly, roughly a year ago, King sat in the camp that was looking at economic indicators and anecdotal evidence on growth and felt that the bleak warnings on the UK’s future were slightly misplaced.
He and others were later proved correct as historic data was gradually nudged up. Now, though, “suddenly everyone is optimistic”, King said, and he believes that this view looks uncertain.
Arguing his point, King said that with QE unchanged at £375bn, monetary growth is dependent on bank lending, but this has remained minimal. “While banks are increasing gross lending for mortgages, net lending is virtually zero and lending to non-financial corporations remains negative,” King argued.
“Without credit growth, it is hard to be optimistic about the outlook for economic growth,” he continued, adding that while the government was keen to get banks agreeing loans again, stricter regulation was making it “impossible”.
Healthy PMIs
But while King is pessimistic – though he acknowledged the fiscal deficit is finally dropping – Fidelity Worldwide Investments’ Greetham is more upbeat.
Reacting to the latest PMI figures which showed UK manufacturers enjoyed a stronger than expected November, Greetham said: “We expect the strong growth trend to continue”.
Backing up his view, the strategist pointed out that the breadth of more positive data was encouraging, adding that within the nitty gritty of the PMI survey, demand was rising.
He argued: “[The] housing market recovery is broadening into other sectors with the UK PMI rising 2.4 points to 58.4, a level exceeded only after the UK left the exchange rate mechanism in 1992 and in the very early part of the recovery from the Lehman crisis slump.
“The guts of the survey were very strong indeed, with the leading new orders minus inventories balance rising to a record high consistent with around 4% annual growth.”
Positive on sterling and midcaps
Going forward, Greetham disagreed with Investec’s King on lending and said that banks are “keen” to expand their mortgage books, and that the cost of doing so is dropping.
Moreover, the OBR is widely expected to revise up its growth projections on Thursday, ahead of the Autumn Statement delivered by Chancellor George Osborne, and all in all, Greetham added that better growth should lead to good things for the UK market.
“It supports a positive view on sterling and on the more domestically focused midcap sector of the UK stock market,” he said.
