UK Growth Outlook Dims Further

Britain's economy isn’t going to pick up for at least the next two years as consumers struggle to lift spending.

Respondents to Bloomberg’s first UK survey of 2018 showed few signs of new year optimism. The median forecast for growth this year was kept at 1.4%, and no acceleration is seen in 2019. While gross domestic product probably gained 1.6% in 2017, more than previously estimated, that’s still the slowest in five years.

The economy started cooling last year as accelerating inflation fueled by the pound’s post-Brexit vote slump squeezed consumers. But that didn’t stop the Bank of England raising interest rates for the first time in a decade on concerns about domestic price pressures. According to the survey, another hike is likely this year, with Scotiabank saying it could come as early as May.

Data on Tuesday showed price growth has peaked, slipping to 3% in December from a 5 1/2-year high of 3.1% a month earlier. Yet that’s above the BoE’s 2% target and faster than average income gains, leaving retail sales struggling to gain traction.

Household consumption is projected to weaken to 1.2% this year, and pick up only slightly to 1.3% in 2019, the survey showed. It averaged 2.3% in the five years through 2016.

If wages pick up and consumption strengthens, the BoE may raise its key rate from 0.5% sooner than the fourth quarter, a minority of economists said. By contrast, a few see policy makers waiting another two years before raising borrowing costs from emergency lows again.

Moving Jobs Abroad

Moves that could force investment firms to transfer hundreds of British jobs to the European Union after Brexit are being described by asset managers as a threat to one of the continent’s biggest success stories.

The investment-management arms of JPMorgan Chase & Co., Axa SA and Standard Life Aberdeen Plc are among firms criticizing a possible clampdown on mutual funds known as UCITS that are officially EU-based but often managed from elsewhere under a system known as delegation. Such funds oversee about €9.1 trillion ($11 trillion).

“Delegation has worked extremely well historically and has been critical in making UCITS not just a European, but a truly global, success story,” said Massimo Greco, head of European funds at JPMorgan Asset Management. “We should take care not to tamper with a framework that has served Europe and global investors well over the past three decades.”

Europe is seeking to ensure that it will continue to have oversight of asset managers, and regulators have warned that “letterbox entities”, nominally based in Europe but managed from abroad, will not be tolerated. That makes London’s position as the second-biggest asset-management center in the world more vulnerable as funds based in Britain have to reregister in the bloc, meaning hundreds of senior managers could have to relocate from London.

Land Grab

“It’s a land grab. It seems to me to be a very protectionist policy,” James Athey, senior investment manager at Aberdeen Standard Investments, said in an interview with Bloomberg Radio. Proposed changes in portfolio management and derivatives clearing are “about trying to ensure Britain is punished suitably.”

The European Commission wants the European Securities and Markets Authority to play a bigger role when firms plan to “outsource, delegate or transfer risks” to non-EU countries, according to a statement in September. A more powerful regulator would be able to reject the registration plans of funds if it deems that major decisions are not made by management based within the bloc.

Supporters of the existing UCITS regulation say the funds are successful precisely because managers can be based in locations where they invest regardless of where the business is domiciled.

While almost €1.1 trillion of UCITS fund assets are domiciled in Britain, according to PricewaterhouseCoopers, the implications may spread beyond the city of London. UCITS funds are often domiciled in Luxembourg and Ireland, but their managers can be based anywhere in the world to focus on the markets where they invest.

"The commission’s proposal would upend a successful regulatory framework and put at risk the global use of UCITS,” said Dan Waters, managing director of ICI Global, the global fund management association. "Sadly, investors would come out the greatest losers of all, facing fewer fund choices at higher costs."