Market Update – 12th August 2020.

This morning’s headlines have been concentrated on the UK’s Q2 GDP data, which showed the UK economy contracted by 20.4%.

Although this shouldn’t have come as a surprise, as we could all see that the coronavirus lockdowns shut much of the economy down, there have been plenty of negative headlines, especially comparing our 20.4% contraction to that of say Germany (which contracted by 10.1%); France (-13.8%); Italy (-12.4%); and Spain (-18.5%).

While we can’t dispute the UK’s weak relative Q2 performance, these are not simple apples-to-apples comparisons.  Italy and Spain were both impacted by the coronavirus much earlier than the UK, meaning that their Q1 GDP contraction was much bigger than the UK’s.  Additionally, the UK had a relatively long lockdown – for example, while Germany went into lockdown at roughly the same time as the UK, they started easing their restrictions nearly a month before the UK.  Also, as the consumer accounts for around 60% of the UK economy, compared to just over 50% in Germany, the closing of shops and restaurants had a much bigger economic impact.

Moreover, there are also plenty of positives to draw from today’s data.  For example, the economy appears to be recovering quicker than even we expected (and we have been among the most positive commentators) as the UK economy expanded by 8.7% in June.  Additionally, May’s growth was revised up to 2.4% from 1.8% and April’s contraction was revised to 20% from 20.3% – and equity markets have this morning given their seal of approval to these positives, as the FTSE-100 is, as we write, up around 50 points, or 0.8%.

In addition, given pubs and restaurants reopened in July (and judging by the success of the government’s ‘eat out to help out’ scheme so far in August), we expect GDP data for July and August will also look very good.

However, despite this positivity, we still believe that the UK needs further monetary stimulus and as such the BoE will cut UK interest rates and/or increase QE, as health, employment and Brexit concerns are likely to keep a lid on consumer spending – for example, as the government’s job retention (furlough) scheme is now starting to be wound down (and ends completely on 31 October 2020), unemployment is likely to rise sharply in the coming months.

Investment Management

The latest market updates are brought to you by Investment Managers & Analysts at Wealth at Work Limited which is a member of the Wealth at Work group of companies.

Links to websites external to those of Wealth at Work Limited (also referred to here as 'we', 'us', 'our' 'ours') will usually contain some content that is not written by us and over which we have no authority and which we do not endorse. Any hyperlinks or references to third party websites are provided for your convenience only. Therefore please be aware that we do not accept responsibility for the content of any third party site(s) except content that is specifically attributed to us or our employees and where we are the authors of such content. Further, we accept no responsibility for any malicious codes (or their consequences) of external sites. Nor do we endorse any organisation or publication to which we link and make no representations about them.