This is part two of our examination of the impacts that a slowdown in the Chinese economy could have on the UK. In part one we looked at what impact it might have on housing, so join us as we check in on interest rates, manufacturing and more.
Before the Chinese market took its tumble, debate had been heating up over whether Mark Carney and his merry band of policymakers would lift the UK from its historically low interest rate of 0.5%, with popular thought suggesting that the rates might be increased in the first quarter of 2015. This latest turmoil in china may force the Bank of England into deeper thought though, as the global economic output doesn’t look as rosy as it did just a couple of months ago.
Although Governor Mark Carney spoke last month on the issue of Chinese turmoil and its effect on UK interest rates, saying “Developments in China are unlikely to change the process of rate increases from limited and gradual to infinitesimal and inert.” But with global growth looking more uncertain and cheaper commodities keeping inflation low, the Bank might still decide that it’s not yet time to increase interest rates after all.
Pensions and shares
UK shares, like many world markets, have been hit by the dramatic swings on China’s exchanges. Almost £74 billion was wiped off the FTSE 100 on the worst day last week as it tumbled 4.7% in the wake of Black Friday. By the end of the week though, it’d recovered its losses and was buoyed by the brighter economic news coming from the US and some convincing emergency measures put into place by Chinese policymakers. Still, August was the worst month since May 2012 for the FTSE, losing 6.7% overall. Financial experts are advising pension savers with money in shares not to worry about short term volatility, but the real question is what long term returns look like.
There are a couple of factors at play in the FTSE’s ups and downs. First, there’s the level of risk investors attach to shares in general. As sharp falls in Chinese stocks shook investors nerves around the world, many investors got rid of their more risky shares in favour of solid options like gold or government bonds. Many analysts think equities are likely to remain an attractive investment as the global economy slowly recovers and should remain attractive as long as yields on assets such as bonds remain low and commodity prices stay above recent lows.
The second factor on the FRSE is the importance of mining and energy-company shares in the index. If China requires less iron ore, oil and copper, shares could hit a low and damage the market further.
Confidence has been shaken in the UK’s European trading partners, and so many businesses have been looking to China for opportunities over the last few years. With China now looking a more uncertain prospect, the British Chambers of Commerce have warned that it could be felt in some way in the UK. Furthermore, many British companies in supply chains could be affected if China’s ability to trade in the volume it does is compromised. Our exposure at Custom Fittings is minimal.
At the moment, China is a relatively small part of the UK’s export business, accounting for less than 5% of UK exports. There would be a slowdown of sales in luxury cars and consumer goods, which the UK is somewhat renowned for. Perhaps the greater danger is the way businesses in the UK are perceiving the threat from the Chinese market fall, with almost half of all companies polled by the EEF said they were concerned about a possible sharp slowdown in China. That sort of fear might hold back UK businesses from investing in themselves and expanding their reach globally. Part of the UK’s good growth has been from businesses investing in themselves once again, and losing that would indeed damage the UK.