Old Mutual Investment Group

Macro Perspectives 37 | UK market’s toxic macro environment

September 13, 2022 Old Mutual Investment Group
Old Mutual Investment Group
Macro Perspectives 37 | UK market’s toxic macro environment
Show Notes Transcript Chapter Markers

Portfolio Manager, Peter Brooke, shares his latest weekly perspective, with a bearish view on the UK economy, considering the toxic mix of higher house prices, low unemployment and higher government spending that the country is currently facing.

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Peter Brooke  00:00

Good day. I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 37 of 2022, and I'm recording this in London. Super excited to be out at an overseas conference again, this time improving my knowledge in healthcare and also going to a global financials conference. So far, the UK is actually a bit uninspiring, with a long wait for luggage at Heathrow and a light drizzle as I walked all of my meetings. 

Peter Brooke  00:27

As many people know, I've been pretty bearish on the UK economy for some time and saw Brexit as willfully damaging the economy. So, I think it is only fair that I report that the UK is employment data showed the lowest unemployment rate since 1974. We in South Africa can only dream of unemployment of 3.6%. However, this number is actually not that good news. Higher wage pressure means higher inflation, and therefore higher rates. Some of the reason for the low unemployment is also a decline in the supply of labour. Less people want to work. A fascinating theory I heard from a Morgan Stanley economist today is that some of this is actually caused by reduced health. Record high waiting lists at the NHS might actually be affecting the supply of labour. 

Peter Brooke  01:25

The other big news in the UK economy is that the new Prime Minister Liz Truss is pivoting policy away from tight fiscal policy and loose monetary policy, to loose fiscal policy and tight monetary policy. She is talking about 150 billion pounds of energy subsidies. This will mean more debt as the budget deficit blows out. The UK government debt to GDP has grown from 27% in 2001 to 96% 20 years later. If the UK was an emerging market, can you imagine the pressure? Consistent current account deficit, a sharply deteriorating fiscal position, regular political change, big populous payouts for Covid and energy subsidies, accelerating inflation, and negative real interest rates. I see no choice except higher interest rates, which will put pressure on mortgage payments. And that will feed into lower real house prices. Higher house prices, low unemployment, and higher government spending is a toxic brew. 

Talking of brews, though, they have excellent pubs here, and I'm heading out to try some now. Until next week, when I'll share more feedback. 

A low unemployment rate in the UK – is this actually good news?
What new Prime Minister Liz Truss’ pivot in policy will mean for the UK economy