WeeklyWatch – UK growth affected by increased costs and the Delta variant

14 September 2021

Stock Take

Sluggish growth

The Office for National Statistics (ONS) said that UK gross domestic product (GDP) grew by just 0.1% in July, according to figures released at the end of last week. The main driving force was production output growth, with the services sector generally flat, and the construction sector lagging for the fourth consecutive month.

Various commentators have noted that increased material costs, staff shortages and the rising COVID-19 Delta variant have all been contributors, with the UK economic recovery still falling 2.1% below its pre-pandemic levels.

According to Azad Zangana, Senior European Economist & Strategist at Schroders, certain sectors could continue to experience sluggish growth in the coming months:

“Overall, this is a poor set of figures, and will prompt forecast downgrades for UK growth. It may be that as concerns eased over the Delta variant, the economy re-accelerated in August, but other fragilities remain.

“The housing market is running on borrowed time, as the Stamp Duty holiday has come to an end. The temporary tax cut brought forward demand, causing house price growth to hit double digits. The Royal Institution of Chartered Surveyors is already warning of a slowdown in prices, which we believe could hurt activity elsewhere over the course of the next year.”

This news helped close a mediocre week for UK equities, during which both the FTSE 100 and FTSE 250 dropped by over 1.5%.

Challenging times

With the exception of Friday’s GDP figures, UK markets battled with a number of challenges. For example, the government revealed plans for a further 1.25% tax on dividends – possibly reducing future returns for income investors.

Last week also witnessed a number of central bank figures indicate that COVID-19 support measures might start to be reduced by the end of the year.

On Wednesday, James Bullard, President of the Federal Reserve Bank of St. Louis – one of the 12 Federal Reserve Banks that constitute the Federal Reserve System – announced to the Financial Times that the US central bank should look to start tapering its bond-buying programme by the end of 2021 or during the first half of 2022. On the very same day, Robert Kaplan, President of the Federal Reserve Bank of Dallas, declared that he would seek to push for a tapering as early as October.

The following day, the European Central Bank (ECB) disclosed that it would start slowing down the pace of its bond-buying programme, although ECB President Christine Lagarde denied this was the start of a wider bond-purchase tapering, instead declaring: “The lady’s not for tapering.”

As part of its pandemic emergency purchase programme (PEPP), the ECB will carry on conducting net asset purchases up to a total of €1,850 billion – at least until the end of March 2022.

In a statement, the ECB remarked:

“Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the pandemic emergency purchase programme (PEPP) than in the previous two quarters.”

It likewise kept interest rates at the same level. As for the future, Andrew Kenningham, Chief Europe Economist at Capital Economics, said:

“December is shaping up to be a crucial meeting. Christine Lagarde said the Governing Council had not yet discussed the key long-term questions of when the PEPP will be ended and how the APP will be revised, but she implied that these would be decided in December. At that point the Bank will have its first 2024 forecasts to consider, and the earliest possible end date for the PEPP (March 2022) will be imminent.”

Ripple effect

Amidst so much discussion around putting the brakes on government support, it’s no doubt unsurprising that global markets broadly struggled. The STOXX Europe 600 dropped over 1%, with the majority of the falls happening on Wednesday and Thursday. American markets were on the receiving end of similar falls, with the S&P 500, Nasdaq and Dow Jones all down for the week.

Aside from equities, cryptocurrencies had a particularly difficult week, with severe falls experienced by Bitcoin and Ethereum, which then brought the recent recovery of cryptocurrencies to a grinding halt. In the same week, El Salvador adopted Bitcoin as legal tender.

Wealth Check

Last week, the government affirmed a series of tax rises to pay for social care, with National Insurance contributions planned to increase by 1.25 percentage points as of April 2022.

The extra funds will undeniably go some way to plug the funding gap for social care, yet individuals need to understand that, in the majority of cases, they will still have to pay for some or all of it themselves, observed Tony Müdd, Divisional Director at St. James’s Place.

“We welcome the government’s intentions to support additional funding into social care but acknowledge more is required around raising awareness of who pays for care, plus solutions for increased private funding.

“The harsh reality is that most older people in the UK requiring long-term social care will need to pay for some or all of it themselves, and exactly how much care costs vary from person to person.”

Further to the NIC increases, Downing Street also made an announcement regarding an increase in dividend tax – which will likewise rise by 1.25 percentage points from next April.

The news shines a spotlight on the significance of holding investments within wrappers, such as ISAs, pensions and other tax-advantaged investments, so as to enjoy the tax-free dividends that they offer. Speak with your Wellesley adviser if you’d like to find out more, or to make sure that you’re maximising on the reliefs available.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

 

The Last Word

“I don’t feel absolutely any pressure. I’m still only 18 years old. I’m just having a free swing at anything that comes my way.”

– British tennis player Emma Raducanu enjoys the limelight after winning the US Open in New York over the weekend.

 

The information contained is correct as at the date of the article.

Schroders is a fund manager for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

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