Analysing the UK economy or more importantly, forecasting where its headed is no easy task.
Policy makers have been trying to pull the economy away from one that is consumer driven, to one that is more balanced incorporating growth from the manufacturing, construction and export sectors.
Hows that going for you?
Unfortunately, especially for the Tories, its simply not happening as well as was hoped for. In fact, its barely happening at all. Earlier, this week the Office for National Statistics produced data showing that the economy grew by 0.5% in the final three months of 2014. Thats actually down from the 0.7% growth recorded in the third quarter.
The problem is clear, the solution is not
Its all very well to lower interest rates and print money to stimulate the economy, but that stimulus has to penetrate through several layers of the economy. At the moment as is the case in other parts of the world it seems to be doing the world of good for the financial services sector, but not much else.
The construction sector, for instance, contracted by 1.8%. Travis Perkins (LSE: TPK) is a building products company and is obviously exposed to growth in this sector. The companys already on a reasonably tight profit margin of 4.5%. It also has a P/E ratio of 17 and earnings per share growth of less than 1%. If the construction sector contracts further, its hardly going to be good news for investors in this stock.
Then you have manufacturing. It grew by just 0.1% last quarter. That was its worst performance since the start of 2013. Manufacturing companies around the world have been hit hard in the wake of the Great Recession, but Britains manufacturers have been hurt particularly badly. There are several reasons for that but two reasons include the fall of the Eurozone economy (Britains major trading partner), and the strength of the pound. Sanctions imposed on Russia have not helped either.
Rolls-Royce Holding (LSE: RR) (NASDAQOTH: RYCEY.US) has been a casualty of this. After putting on a brave face in 2014, it recently fronted the public to say, Group underlying revenue will be in the range of plus or minus 3% and profit in the range of plus or minus 3% compared with our expected outcome for 2014. Its hard therefore to see conditions improving significantly for Rolls-Royce in the short-to-medium term.
The manufacturing, construction and export sectors also benefit greatly from certainty. Analysts have repeatedly said the upcoming general election is one of the great sore points for the economy (and the market) because it represents so much uncertainty.
So where is the money?
As I mentioned earlier, one sector that seems to be doing okayis the financial services sector. That includes the banks. In particular, this Fool sees very little room for a rate rise in the foreseeable future, which is good news for Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) which controls much of Britains housing market. I wont make any comments as to whether the property market actually needs further stimulus, but Im sure Lloyds executives wont be complaining about it.
The British consumer is still using the British financial services system, and the system is making money, so investors will benefit from that. Assuming the economy doesnt go backwards from here, its also reasonable to assume that Lloyds profit margin will benefit when Mark Carney finally decides to raise interest rates.
If you’re a little tired though of chasing growth (or waiting for the economy to spring to life), remember it’s always wise to chase good dividends. Companies with solid or special dividends, like Vodafone, are getting more attention at present because it’s becoming harder to impress investors with earnings performance.
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