Market Update - 14th August 2020

The UK’s economic output fell by 20% in the second quarter. The figures, while alarming, are not surprising, Nevertheless, they place the UK firmly at the bottom end of the major economies and with Brexit round the corner, it is perhaps clear why global investors still are not tempted by UK assets.

The GDP figures put the UK in its first recession since 2009. Output is now back to levels last seen in 2003. Private consumption collapsed, falling 23.1% quarter on quarter, while business investment also dived, dropping 31.4% over the quarter. 

The figures leave the UK economy as the worst performer in the G7. France, for example, dropped 13.8%, while Germany dropped by 10.1%. Even beleaguered Italy, who took a significant early hit from Covid-19, dropped just 12.4%. Only Spain, with a fall of 18.5%, has come close to the UK’s dismal performance. A heavy reliance on the services and hospitality sector, plus the Government’s slow and patchy response to the virus, have been the main contributors to the weakness.

In the early weeks of the pandemic the US was viewed as a safe haven while infections soared and economies were locked down in Europe.  More recently the tables have turned, as the infection rates increased and the easing of restrictions was reversed in many states.

There have been a number of reasons for investors to favour Europe over the US.  The US is dominated by highly-valued technology companies which have dragged the overall level of the market higher.  In comparison valuations in Europe remain attractive. Europe is also exposed to the health of the global economy, with a significant export sector that will benefit from a return to normality in Asia and in its home region. The US economy is much more domestically focused, so renewed lockdowns pose a proportionately bigger problem for American companies.

More significantly, the response of the EU has helped to build confidence.  Individual countries supported households and businesses during the lockdowns, but the €750 billion EU recovery fund, which was agreed by EU leaders after a four day summit in July was seen as a real breakthrough.

The scale of the recovery fund was a boost to markets when it was first proposed. The fact it has now been agreed, albeit after protracted negotiations, shows how the European authorities are capable of a credible and co-ordinated response.  With fiscal policy finally stepping up to facilitate the post-Covid recovery, the European Central Bank is no longer 'the only game in town'.

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Tags: coronavirusCovid 19economies locked downEU recovery fundEuropean Central BankG7GDPPandemicRecession

Categories: Market ReviewSavings

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