UK growth hits the ‘sweet spot’

The latest GPD figures out today show that the UK economy has grown again – and has now expanded to be worth more than its peak in 2008.

The Office for National Statistics (ONS) figures show that the UK economy grew by 0.8% in the second quarter of this year. On an annual basis, gross domestic product (GDP) expanded by 3.1%.

This follows on from growth of 0.8% in the first three months of the year, and it now represents a sixth consecutive quarter of positive growth - the longest positive run since the financial crisis.

All the independent economic forecasters surveyed by the Treasury are now talking of growth of 3.0% or over for this year. As we are into the second half of the year, you could say that these forecasts are not particularly earth-shattering but the good news is that the mooted threat of a slowdown in the second half of the year looks to be receding.

Yesterday, the International Monetary Fund (IMF) forecast that the UK would expand by 3.2% this year, up from a previous forecast of 2.8%.

The influential EY Item Club is also predicting that the UK economy will hit a ‘sweet spot’ with GPD of 3.1%, pointing out that the UK is now posting the strongest growth amongst the G7 nations. This compares with 2% GDP growth in Canada and 1.8% growth in Germany.

The Item Club claims that companies that have been stockpiling cash now have the confidence to invest, and are predicting that business capital spending will increase by 12.5% this year, taking the pressure off consumer spending which has thus far largely driven the recovery. Investment was up 5% in the first quarter.

All this is good news. The question is whether this is the only 3% year we see, or if this growth level is now sustainable. According to most forecasters, the answer seems almost! The Bank of England for example is forecasting 3.4% growth this year, followed by 2.8% and 2.9% for 2015 and 2016.

So what does it all mean for investors? The markets have certainly been bullish and have effectively been on a bull run for a while, with the Dow Jones trading at record highs and the FTSE 100 getting quite close to its previous all-time high of 6930. Some analysts believe the bull run will continue, with a few optimists even predicting that the FTSE 100 will eventually reach 10,000.

Others however believe that we are due a market correction, as the global economy is not strong enough to sustain such high levels coupled with geopolitical risks such as the events in Ukraine. Their advice would be to diversify your assets, so as to spread the risk.

Certainly, as an investor you should never be complacent, however well the markets appear to be doing. Re-appraising your asset allocation model in line with yourrisk profile could make sense. Or you could consider our multi-managerapproach, which provides risk-rated model portfolios based on getting the right mix of assets to meet your long-term objectives.

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