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Rathbone's Market Commentary

Posted Tuesday, 25 July 2017, 12.18pm

News from David Coombs, Head of Multi-asset

The UK horizon looks even more ominous than it did three months ago. Political mistakes and machinations have reduced the visibility of everything from public finances and policy to who will be leading the country in six months’ time. This cannot be encouraging for capital investment in the UK. Auto manufacturers have slashed investment by half to just over £322 million in the first half of 2017. It is just one sector and not necessarily indicative of the wider economy, but it’s a worrying trend all the same. In 2015, automakers spent £2.5 billion on capital works here.
Less investment means fewer jobs, lower productivity (so less pay) and recession is a step closer. If the Government does decide to lift the public sector pay freeze it would add inflationary pressure at a time when prices are already rising much faster than wages. Paying for this would mean higher taxes, more government borrowing or both. Higher taxes would depress spending and discourage labour, while issuing more debt would push bond yields — and mortgage rates — higher. If that happens, household pocket money will be shredded in the crossfire of stagnant wages, high inflation and higher repayments and rent.
The UK savings rate is just 1.7%, the lowest since the 1950s, so there is precious little left in the ‘larder’ for a ‘rainy day’.

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