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Market update

Our report on what’s happening in the UK and beyond

18 December 2020

5 minute read

We examine market movements as the Brexit transition period comes to an end.

Two negotiations remained at the centre of the market glare this week. The climax to Brexit negotiations and stimulus talks in the US provided the background for more sedate markets. There was some notable action in the areas of the market more sensitive to the UK economy.

Moves in Gilts and Sterling were driven primarily by investors’ attempts to incorporate the changing expectations with regards to the manner of the UK’s departure from the EU. Incoming data on the global economy suggests a slower pace of growth than seen in recent months.

Our perspective

The all-important US economy has proved more resilient and adaptable than many have feared for large parts of this year. The support packages from the government have been essential in this. Through the various measures in the CARES Act enacted earlier in the year, 2020 has been one of the better years for consumer income growth of the last few. The actions of the US government, among others, have proved that while you can’t avoid the output declines that come with recessions, you can materially alleviate the suffering of your citizens via transfers.

The problem for policymakers, and all of us, is that we simply do not know which of the multitude of changes this pandemic forced onto our lives will endure beyond the vaccination programmes. Shifts in the way we shop, work and congregate will likely eradicate jobs in some areas, perhaps creating them in others. This more sudden adjustment joins the pre-existing technological revolution in areas from artificial intelligence to robotics in further warping the labour force.

The suspicion is that this could be an expensive period for governments around the world if the ‘build back better’ slogans are to be fulfilled. The necessary investments in the green transition and aspects of the social safety net (e.g. education) may eventually pay for themselves, but the upfront cost will be steep.

The good news is that there has been a widespread re-evaluation of the dangers of government debt. Or at least the levels at which government debt becomes a danger. The debate is shifting away from levels of indebtedness, usually described by comparisons with a country’s output or GDP, towards the cost of debt service.

Viewed from this angle, many governments (the US and UK included) have debt servicing costs substantially below the similar moment of 2009. As debt is refinanced at the now much lower interest rates, those servicing costs could actually fall further in the next couple of years. The reality is that if there is a will to spend more fiscal resources, there is still viable headroom to do so.

The question on everyone's mind in this context is: will interest rates remain low? We can only guess. However, many are now arguing that the persistence of low interest rates in so many countries indicates a more structural, durable aspect to the forces pushing interest rates ever lower over the last few decades.

To what degree trends in inequality, moves to a more massless, intangible economy or China’s ever-increasing contribution to the global economy are responsible, may not matter that much in such a context. As we’ve pointed out before, these are unbelievably challenging times for policymakers. However, even if interest rates rise a little from these very low levels, a focus on debt servicing costs points to plenty more room to spend yet.
 

Things to consider

The value of investments can fall as well as rise. You may get back less than what you originally invested.

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