As per Goldman Sachs, the Investment Strategy Group (ISG) of Asset & Wealth Management predicts that the U.K. Economy will experience no growth for the remaining year due to a slowdown in expansion caused by stricter monetary policies.
The British economy is expected to be supported by improving real labor income and consumer confidence, as well as excess savings in the second half of the year, despite the projected tighter monetary policy. According to a report by ISG, consumption is expected to turn positive, while the global expansion and resilience in the services sector surpass expectations in the first quarter, with lower natural gas prices.
By the end of 2024, mortgage holders in the UK will need to make annual interest payments of £3,000 or an additional monthly payment of £250 ($320), according to ISG’s findings. Buyers who currently have higher interest rates will need to refinance their loans when the average mortgage holder in the UK must pay an extra £250 per month. The majority of mortgages in the country are tied to fixed-rate contracts with maturities ranging from five to two years. Due to the sensitivity of the UK economy, other regions may experience a higher increase in interest rates, which is a concerning factor.
To avoid a significant decrease in fundamental inflation, ISG anticipates that this classification will continue to be resistant until the conclusion of the year, as a result of the labor market’s strength and the substantial increase in wages. Services inflation remains enduring. However, prices for essential goods are also declining, and there are initial indications that it is beginning to stabilize in the energy and food sectors, while inflation in the U.K. Is greater than that of the U.S. And the euro area.
According to ISG, “We have a significant amount of uncertainty regarding the trajectory and extent of increases, which will ultimately be determined by forthcoming economic data.” Since December 2021, the central bank has already increased rates by 490 basis points. With the policy rate reaching its highest point at 5.75%, ISG predicts that the Bank of England will implement three more rate hikes of 25 basis points, one at each of the bank’s gatherings in August, September, and November, due to persistent inflation.
The target for 10-year gilt yields is expected to increase due to the BOE’s anticipation of higher policy rates and better-than-anticipated economic data. It is projected that the yields will reach approximately 3.75% by the end of the year, with a potential range of 3.5% to 4%. Inflation expectations for the U.K., The U.S., And the euro area remain stable and at similar levels compared to longer-term market-based indicators. In recent months, inflation break-evens and inflation-linked swaps have remained at low levels. The U.K. Yield curve continues to flatten as a response to positive surprises in economic and inflation data, with shorter-term interest rates approaching longer-term rates. Bond market investors in the fixed-income sector do not anticipate a significant increase in inflation.
ISG states, “We maintain a neutral stance on the pound, with the possibility of downside risk.” Exposing a source of currency vulnerability, the current account deficit of the U.K. Has decreased to 3.8% of GDP amidst a deterioration in the trade conditions. The currency encounters challenges in the future due to sluggish economic growth in the U.K., Insufficient capital flows, and market positioning, according to the team. However, the pound has performed comparatively well compared to other developed-market currencies this year, and policy rates still favor British sterling, as emphasized by ISG. Regarding the pound,
The challenges of the UK’s economic issues are expected to be only a modest concern for the country’s stock market, as it generates 77% of its overseas revenue from sales in Europe and the U.S., With 30% and 64% coming from the 500 S&P and 50 Stoxx Euro indices, respectively, compared to the 100 FTSE market.
According to ISG, “The effect of slower growth in the United Kingdom on FTSE 100 profits is expected to be minimal.” Specifically, ISG forecasts that valuations will increase in the second half of the year, primarily due to the energy sector. Forward price-to-earnings ratios are currently trading at an 18% discount compared to the historical median, while U.K. Equity valuations continue to remain below average.
Global Investment Research (“GIR”) at Goldman Sachs (“GS”) provides research and analysis on various groups and teams within the firm’s portfolio management. The views expressed by GIR may significantly vary across different groups and teams. GIR does not represent the views of GS as a whole or the firm’s financial research. GIR’s views represent the views of its own portfolios, including the Investment Strategy Group (“ISG”). ISG focuses on market analysis and asset allocation strategy formation for GS. Additionally, GIR’s analysis and formation strategy allocation asset also focus on the Wealth Management business of GS and the Asset & Wealth Management (“AWM”) group. It is important to note that the views expressed by ISG and AWM are separate from those of GS and GIR.
The future of performance in the past may be subject to change, which can vary. Market and economic conditions can materially change, and significant revisions may be made based on assumptions. Forecasts are dependent on these factors.
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