Will the ‘Boris bounce’ fall flat?

March could be a big month for the UK stock market. Advisers and clients continue to await news on the spread of the COVID-19 virus and whether containment and quarantine policies are starting to work; the Bank of England will formulate its first monetary policy decision under its new Governor, Andrew Bailey, on 26 March; and the new Chancellor of the Exchequer, Rishi Sunak, will outline the fiscal policy plans of the Boris-Johnson-led Conservative Government on 11 March.

How the viral outbreak develops is still anyone’s guess. The profit warning from Apple suggests the illness is starting to have a negative impact on economic activity, although markets still seem to be leaning toward the view that any effects will be relatively short-lived, as was the case with SARS in 2002–03, and that the world is not on the brink of the sort of apocalypse witnessed in John Wyndham novels.

“The Bank of England still seems more inclined to cut interest rates rather than raise them, although the arrival of a new Governor could change the tone, as could both fresh economic data and Government policy.”


The Bank of England still seems more inclined to cut interest rates rather than raise them, although the arrival of a new Governor could change the tone, as could both fresh economic data and Government policy.

On the policy front, economists seem convinced that Mr Sunak will oversee an increase in Government spending as the Government prepares for the ending of the Brexit transition phase on 31 December and looks to cement its current popularity in the seats won in last year’s General Election.

In terms of the economic data, there have been some tentative signs of improvement and it will be interesting to see whether the latest batch of purchasing managers’ indices for the manufacturing, construction and services industries – coming out between 2 and 4 March – show additional momentum or not.

February’s improved PMI surveys hinted at improved momentum in the UK economy

Source: IHS Markit/CIPS, Refinitiv data

Moving parts

There are four main moving parts to any country’s GDP data, at least from a pure accounting perspective. They are:

  • private consumption plus
  • business investment plus
  • government spending plus
  • trade (defined as exports minus imports).

  • “While advisers and clients may not be accustomed to receiving too much good news on the UK economy, this is perhaps one reason why upside surprises cannot be ruled out – although the COVID-19 virus and trade talks between Britain and the EU remain influential wild cards.”


    While advisers and clients may not be accustomed to receiving too much good news on the UK economy, this is perhaps one reason why upside surprises cannot be ruled out. Granted, the spread of COVID-19 and the manner in which trade relations develop between Britain and the EU remain influential wild cards, but it is quite possible that consumer spending, business investment and Government expenditure will all rise, if left to their own devices.

  • The last forecast (March 2019) provided by the Office for Budget Responsibility (OBR) looked for a meagre 1.1% increase in household consumption in 2019, down from 1.7% in 2018 and 2.1% in 2017. However, the OBR then expected an acceleration to 1.5% in 2020 and 1.6% in 2021. This seems sensible enough, especially if the Conservatives follow through with some of their promised tax cuts. Moreover, wage growth continues to outpace inflation and that trend could also boost individuals’ spending power, if it is maintained. One risk here is whether the household savings rate starts to rise. At 5.5% in Q3 2019, this came in well below the near-9% average seen since records began in 1963.

  • Low savings rate could yet hobble consumer spending

    Source: Office for National Statistics

  • The OBR expected business investment to fall for the second time in a row in 2019 but its numbers then looked for a sizeable post-Brexit deadline bounce, with 2.3% growth in 2020 and 2021. The last Bank of England agents’ survey, for Q4 2019, gave some credence to that view as the investment intentions reading improved for the second quarter in a row, albeit from very low levels.

  • Business investment could be about to pick up

    Source: Bank of England Agents’ Summary of Business Conditions report, Q4 2019

    “Growth in Government spending looks set to accelerate, at least if the ejection of the apparently fiscally prudent Sajid Javid from 11 Downing Street and the decision to press ahead with the HS2 rail project are any guide.”


  • Growth in Government spending looks set to accelerate, at least if the ejection of the apparently fiscally prudent Sajid Javid from 11 Downing Street and the decision to press ahead with the HS2 rail project are any guide. Another former Chancellor, Philip Hammond, had begun to refer to £26 billion of fiscal headroom, which is not a pot of cash but extra spending that would take the UK’s annual budget deficit back to 2% over the next five years. The only question to ask is presumably whether the new Government stops there or spends further. The OBR factored in a relatively modest increase in spending in 2020.

  • The hardest area to judge may be trade, given the impact of Brexit talks, the COVID-19 outbreak and wider global trade tensions. Export growth has sagged of late while import growth has surged, increasing the trade deficit and weighing on growth.

  • However, the OBR did expect the negative impact to shrink in 2020 and beyond so it will be interesting to see how the OBR’s forecasts change from a year ago when the next Budget is released on 11 March.

    Cut-out-and-keep guide to OBR forecasts for the UK economy

    Source: Office for Budget Responsibility, March 2019

    Ups and downs

    If this column was forced to guess, Government spending could provide the greatest upside surprise, and trade is perhaps the biggest risk, with the overall scope for surprises slanted to the upside. If so, that could favour domestic-facing stocks over the multinationals of the FTSE 100, although, as Warren Buffett once commented: “Forecasts tell you a great deal about the forecaster; they tell you nothing about the future”.

    AJ Bell Investment Director

    Russ Mould’s long experience of the capital markets began in 1991 when he became a Fund Manager at a leading provider of life insurance, pensions and asset management services. In 1993 he joined a prestigious investment bank, working as an Equity Analyst covering the technology sector for 12 years. Russ eventually joined Shares magazine in November 2005 as Technology Correspondent and became Editor of the magazine in July 2008. Following the acquisition of Shares' parent company, MSM Media, by AJ Bell Group, he was appointed as AJ Bell’s Investment Director in summer 2013.

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