No wonder the Autumn Budget was delayed for as late as possible, with improved economic numbers expected. Now we are seeing the evidence of this with the latest raft of data.
The first thing to note, and one of the most important metrics, is the lower inflation data for January showing that inflation slowed to 3%. Still 50% above the Government’s 2% target, but a welcome number all the same.
This has positive implications for the prospect of lower interest rates with the futures market now coming in at an 85% probability of a 0.25% rate cut (at the time of writing).
Unemployment data worsened and wage growth slowed. They are interlinked and despite some of the sensational headlines, both the government and the Bank of England see the data as largely positive because strong wage growth is inflationary.
The concern with the unemployment data is the level of youth unemployment. This is far too high nationwide, and here in Dorset too. Fortunately, in Dorset we have a lower level of overall unemployment than the nation’s average. Dorset, interestingly, has a higher level of self-employed people.
The challenge for Dorset is that over the next decade, Dorset’s working age population is projected to decline by 1% whilst the number of residents aged over 65 is expected to grow by 23% (source: Dorset Council).
Despite the gloom around the time of the Budget, everything in the garden is looking rosier now… well, around the UK economy that is, if we take politics out of the equation!
- Retail sales have surged to the highest level for 20 months. This suggests improved consumer confidence.
- The Chancellor will be able to report the biggest budget surplus on record. Quite amazing after the scaremongering around the time of the Autumn Budget. This will hopefully mean less penal tax rises and more economic confidence for businesses and households.
- UK business confidence has lept to its highest level in 8 months. The Institute of Directors’ economic confidence index climbed to – 48% compared with – 66% previously, continuing a rebound from near record lows. While that index remains a negative number, business leaders now have higher confidence in their own firms, up 14% in January from -4% in December, specifically around expectations for investment, hiring and sales.
Helping business confidence, has been more positive policy activity. The hospitality sector being a case in point after a backlash around the sharp rise in business rates. This will have a positive impact in our Dorset economy with many businesses operating in this sector.
In my capacity as Chair of Blue Sky’s Investment Committee, I proposed to the team in November that we should consider moving more dynamically into the UK markets because they were pretty unloved and adverse sentiment had created opportunities. The consensus across markets were effectively “don’t touch the UK” with the overriding belief being “it was cheap for a reason”.
We are fortunate to have Legal & General sit on our asset allocation committee and they too
liked the opportunities in the unloved UK sector. Having made our switches, we are delighted. At the time of writing, our UK holdings deliver double digit returns, in just less three months.
It’s easy just to follow the herd, but it’s important that we challenge the status quo and not become embroiled in the emotion. This is what business leaders are generally good at. Certainly, I see and hear this from the many business leaders I meet on my travels, none more so than here in Dorset.