Markets have been too negative on global economic prospects but the UK could be a laggard when it comes to a recovery, economists and investors have suggested.
Steven Bell, chief economist at Columbia Threadneedle, said consumer confidence had been very low in Europe and the UK due to concerns about the impact of higher energy costs, but could rise over the year - albeit more swiftly on the continent than in the domestic UK market.
According to Bell, energy subsidies mean the issue has not had as profoundly negative an impact as originally feared. Therefore, he anticipates this will lead to higher confidence later in the year.
In fact, he said German retail sales could be very strong as investors regain sufficient confidence to spend accumulated savings from the pandemic.
But Bell added that while this narrative also applies to the UK, he was less optimistic on the outlook for the domestic economy.
He said: “In the dark days of autumn, the implied probability of UK recession reached 91 per cent, an unheard of degree of agreement amongst economists.
"Not only has the energy crisis now passed, but energy prices for next winter have fallen rapidly in the last few months. We expect a fixed-price retail offer below the £2,500 cap for next winter to be available soon. That should remove a significant fear for UK consumers."
While the market is sceptical, Columbia Threadneedle believes the 2.9 per cent target for inflation at the end of this year, set by the government and now backed by the Bank of England, was entirely reasonable.
Energy bills will see a 90 per cent hike replaced with a 20 per cent cut and the impact on the inflation figures will be dramatic. But despite feeling the picture is brighter, Bell is cautious.
He said: “Before we get carried away, the big increase in mortgage rates will be a very significant drag on the UK economy.”
With this in mind, he feels the UK economy will grow, but only “modestly.”
Konstantinos Venetis, director of global macro at TS Lombard, said the UK has been “catching up” with the rest of the global developed economies since around February of this year, and feels that this is helping sterling to perform strongly against its peer currencies in recent weeks.
This is particularly the case as market participants now feel that the Bank of England will be able to put rates up to a greater extent than previously expected.
Venetis said this was “welcome” because it reduces the relative cost of imported goods, and so has the potential to dampen the impact of future higher energy prices on consumer spending.
Money matters
More broadly, stronger sterling has a disinflationary impact on the wider economy as the price paid for imported goods falls.
But despite this optimism, Venetis said he, too, remained very cautious on the outlook for the UK.
