However, there is reason to take a more positive view, particularly with regard to the UK. It has been a slow and dreary road to recovery but the UK economy is in fact just about to embark on its third successive year of above trend GDP growth and real GDP per-capita is now back above 2008 levels. This progress is primarily being driven by a buoyant service sector – i.e. domestically led. The powerful trio of wage growth, lower inflation and momentum in the jobs market is leaving the UK consumer in better financial shape and, crucially, feeling ready to get spending again. The UK high street may not yet be exhibiting “Animal Spirits”, the term famously coined by Keynes, but the crucial point is that the domestic economy has positive momentum.
The majority of UK-focused consumer companies that have reported since the summer have also indicated that they are enjoying a healthy tailwind from an increasingly confident UK public. From pubs and restaurants, to cinemas, to clothing retailers the upbeat message is consistent. Another point worth making here is that so far this looks to be relatively “healthy” spending fuelled by higher real incomes and not from extra borrowing; saving rates have remained steady this year. This should help to underpin the longevity of this recovery and limit the risk in the event that conditions do worsen domestically. A touch of deflation on imported Asian goods may also add impetus to domestic consumer expenditure patterns.
The UK will clearly face a tough few quarters if there is a macro shock such as a major Chinese currency devaluation but it is equally clear that the underlying domestic economy is in reasonable shape and improving. From an investment standpoint, I believe companies geared towards the UK consumer appear to be in a good position to deliver steady progress for the foreseeable future.