Britain is Fortunately not Just Relying on Cheap Money for Growth

Reinvested dividends account for a significant part of overall long term returns from stocks. With this in mind it is good news that British stocks are paying out record levels of income according to Capita Registrars. UK dividends reached £27.2bn between July and September alone, up 6.8% on the corresponding quarter in 2014. A strong US$ also assisted investor returns. Half the value of dividends from Britain’s twenty largest companies are declared in US$ providing shareholders with a currency windfall of £600m. The FTSE 250 Mid Cap index also saw its dividend pay-outs increase by 11% on last year. It is predicted that the largest 350 companies in the UK will pay out a new annual record of £84.8bn in dividends in 2015.

The FTSE 100 hit a 15 year high in April of 7103. Throughout the summer, the index followed other world indices into heavy falls before recovering lost value. The FTSE 100 started June at 6600; fell to a low of 5895 in late August, recovering to 6401 in December. The FTSE 100 has a high component of energy and commodity companies and therefore was affected by the global sentiment to those sectors. The FTSE 250 was not as impacted.

The UK has dipped in and out of deflation this year, firstly in April and then again in September. This fall into negative inflation was put down to lower petrol prices. Core inflation (which does not include volatile food and energy prices) held steady at 1%. Lower prices have put more money into people’s pockets particularly when accompanied by wage growth. This increase in household earnings is supporting consumer confidence.

The International Monetary Fund (IMF) is expecting continued steady growth from the UK. It has predicted that output will grow by 2.5% for 2015 and 2.8% in 2016. Britain is fortunately not just relying on cheap money for this growth. There is plenty of organic momentum. Consumer’s real income is rising with wage growth of 2.9%, the fastest rise in six years.

The Confederation of British Industry (CBI) has, however, struck a more cautious note and downgraded its forecasts for the UK economy due to uncertain trading conditions. It is predicting now a 2.4% growth in 2015 and 2.6% for 2016. They expect wage inflation to rise to 3.2% next year.

The CBI has taken into consideration that the strong £ has made exports expensive and more difficult. The UK economy continues to have a strong service sector but weak manufacturing. We are as a nation particularly reliant on financial services and consumption. Manufacturing accounts for about 10% of UK output while energy and utilities account for 5%, construction 6% and the service sector the remaining 79%.

Figures from the Office for National Statistics (ONS) show that the UK unemployment rate fell to a seven-year low of 5.3% in the three months to September. It was the lowest jobless rate since the second quarter of 2008. The number of people out of work fell by 103,000 between July and September to 1.75 million. There were 31.21 million people in work, 177,000 more than for the April-to-June quarter and 419,000 more than in the same period a year earlier. The ONS confirmed that 74% of the UK working ages are employed.

It has been a tough few months for the UK manufacturing sector. SSI Steel closed its blast furnace and coke ovens in Redcar, while Tata Steel cut jobs in Scunthorpe and Lanarkshire. The Q3 figures for UK manufacturing showed further contraction as it was hit by a summer slowdown in global consumption. The UK steel industry has been affected by global overcapacity, high electricity costs and EU limits on state aid to iron and steel companies.

Foreign investment plays a big part in UK manufacturing with global businesses wanting access to Europe through a country with low corporation tax and flexible labour laws. Unfortunately, the strength of the British pound has made foreign investment more expensive for overseas companies as well as making UK made products more expensive to export.

There has been some recent promising news for Britain’s manufacturers with Q4 bringing in rising levels of orders. The Manufacturing Purchase Managers Index (PMI) jumped to 55.5 in October up from 51.8 in September. This indicated a significant rise in confidence and orders. The 3.7% rise was the steepest recorded in 24 years.

Renewed economic optimism has raised expectations over a Bank of England interest rate rise. Most commentators are expecting a modest increase in November 2016. We believe there is little need yet for a rate rise as inflation is far below the BoE target of 2%.

‘Renewed economic optimism has raised expectations over a Bank of England interest rate rise’

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