Sep 14 2020

The UK recorded strong economic growth in July as coronavirus restrictions eased, but a backtracking on economic normalisation and the risk of a messy Brexit still present challenges moving into the final quarter of the year.

GDP rose by 6.6% from June, when it gained a record 8.7%, with activity being boosted by the reopening of restaurants and bars in early July. This still means that we have clawed back little more than half of the output lost during lockdown, while recovering the rest may prove increasingly difficult as we have previously intimated:

U.K. economy grew in July, but GDP still almost 12% below pre-crisis level

The Government’s furlough scheme ends next month with no new support mechanisms yet announced, and as virus cases rise, new restrictions are being implemented across the country which will slow the recovery. Last week the Prime Minister announced the ‘rule of six’ which sees all social gatherings of more than six people (inclusive of all ages) being banned from 14th September. Police will have new powers to disperse and fine any group larger than six people – indoors and outdoors – with fines starting at £100 and rising to £3,200 for repeat offenders.

As usual, the new rules differ across the home nations, and there are various exemptions for people getting together for work, weddings, funerals and organised sports. We also await the imposition of ‘COVID-secure marshals’ who will act as social distancing traffic wardens in town and city centres, and perhaps even curfews in particularly affected areas. 

More positively, the Chancellor released plans to provide companies with tax incentives for new business investment, enabling them to fully and immediately offset the cost of new capital projects. Under the current regime, companies are given tax relief only on the first £200,000 of investment under the Annual Investment Allowance, while a temporary two-year increase to £1m expires in January.

Elsewhere, odds of another round of fiscal stimulus for the US economy worsened as the Senate could not agree on a slimmed-down package proposed by Republicans. Democrats were united in blocking the legislation, believing the proposals do not go far enough to help struggling workers, businesses and States. The proposed bill would have provided between $500-700bn in aid to unemployment insurance benefits and for small businesses, though a fraction of the $2.2tn deal back by Democrats. The chances now are that no deal is done before the US Presidential election in November.

The Pound fell sharply in value during the week despite more positive economic data as major fault lines in Brexit negotiations opened. The Government’s publication of the controversial Internal Markets Bill caused uproar as it looks to potentially override parts of the Withdrawal Agreement (WA) signed in 2019 and which came into effect on 31st January 2020. The contention surrounds how parts of the WA relate to Northern Ireland’s relationship with the rest of the UK, with the Bill possibly contradicting the WA – and therefore international law – as it says ministers could have the power to ‘disapply’ previously agreed rules relating to the movement of goods and on state aid provisions.

The Government’s actions could see further internal unrest within the Conservative party, with several prominent MPs publicly stating their dissatisfaction with the Bill, and will not help to improve relations between the two sides.

The Pound dropped by more than 3.5% against the Dollar, Euro and Yen during the week as investors shunned the UK, meaning overseas equity holdings received a large positive boost. European and Japanese equities performed best over the week, rising by 5.3% and 4.4% respectively, while the FTSE 100 was up just over 4%, benefitting from the weaker Pound. Emerging Market and Asian equities were slightly further back with gains of 2.6% and 2.55% respectively.

The domestically focused FTSE 250 rose by just 1.21% for the week, paling in comparison to some other indices’ returns, though in local currency terms, was in fact one of the best performing regional indices despite the domestic turmoil.

The US S&P 500 rose by just 0.75% despite the positive currency movements, suffering a difficult start to the week as large tech firms sold off sharply again, carrying on their weaker performance from the previous week. Much-talked about Tesla saw its share price drop by more than 20% on Tuesday alone as some of the most extreme upwards moves were unwound. 

UK government bonds had a stronger week, with Gilts rising by 0.5% and Index-Linked Gilts by 2.6% as uncertainty rose. Overseas bond holdings also performed well in Pound terms, while precious metals prices rose, too.

Finally, positive news emerged that the University of Oxford and AstraZeneca vaccine trials had resumed over the weekend. There are many vaccine candidates currently in late-stage trials, with hopes remaining that one or more of these could break the deadlock we find ourselves in.

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The value of investments may fluctuate in price or value and you may get back less than the amount originally invested. Past performance is not a guide to the future. The views expressed in this publication represent those of the author and do not constitute financial advice.

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Andrea Barker andrea.barker@fairstone.co.uk / Tel. +44 (0) 191 519 6243