Following a technical recession in the latter half of 2023, the British economy appears to be on a rebound this year. The International Monetary Fund (IMF), as quoted on CNBC, raised its 2024 growth outlook for the UK from 0.5% to 0.7%, offering a boost to the country's new government.
The improving growth outlook underscores an optimistic trajectory for the country. The IMF reaffirmed its forecast of 1.5% growth for the U.K. in 2025, in its July update of the World Economic Outlook.
Country’s Growth Expectations Highlight Rising Optimism
Per CNBC, Goldman Sachs has updated its 2025 growth projections for the U.K., now forecasting 1.6% growth in the economy, up by 0.1% from its previous estimate. The investment bank believes that the new government’s fiscal policy will provide a modest increase in demand growth in the short term.
Deutsche Bank followed suit, raising its growth projections by 0.4% from its earlier projection of 0.8% growth, now expecting the British economy to grow by 1.2% this year.
The Bank of England (BOE), as quoted on the Financial Times, revised its GDP growth forecast for this year to 1.25%, up from 0.5%, anticipating a 1% rise in 2025.
According to analysts at Jefferies, as per CNBC, the new government’s substantial parliamentary majority would give a perception of stability in the economy, increasing the appeal of investments in the U.K.
Rate Cut to Fuel Economic Growth
After recent favorable inflation data, the BOE went ahead with its first interest rate cut in over four years, reducing the rate by 0.25% to 5%, according to the Financials Times. However, BOE governor Andrew Bailey, who voted in favor of an interest rate cut, maintained a cautious tone regarding the future interest rate cuts.
Investors anticipate that the BOE will implement one or two additional rate cuts by the end of 2024. According to the BBC, financial markets now estimate a 75% likelihood that the Bank of England would lower rates again in November.
The reduction in the interest rates is expected to provide the much-needed relief to British consumers, boosting the low confidence levels. Lowering the interest rates to 5% signals a path to reduced mortgage, credit card and loan payments, impacting savings rates for millions across the U.K.
Inflation Takes a Positive Turn
Per Official National Statistics data, as quoted on CNBC, inflation in the U.K. remained stable at 2% in the month of June.
According to the BOE projections, as quoted on the Financial Times, headline inflation in the country is expected to rise to 2.7% in 2024, before going on a downward trend. It also anticipates consumer price inflation to decrease to 1.7% by 2026 and further to 1.5% by 2027.
ETFs in Focus
Investors can increase their portfolio exposure to the U.K. with the following pure-play U.K. ETFs to take advantage of the country’s improving and optimistic economic outlook.
iShares MSCI United Kingdom ETF (EWU)
iShares MSCI United Kingdom ETF seeks to track the performance of the MSCI United Kingdom Index with a basket of 80 securities. The fund has gathered an asset base of $3.01 billion and charges an annual fee of 0.50%. EWU has a dividend yield of 3.94%.
iShares MSCI United Kingdom ETF has gained 3.46% over the past three months and 11.53% over the past year.
Franklin FTSE United Kingdom ETF (FLGB)
Franklin FTSE United Kingdom ETF seeks to track the performance of the FTSE UK RIC Capped Index with a basket of 106 securities. The fund has gathered an asset base of $689.6 million and charges an annual fee of 0.09%. FLGB has a dividend yield of 4.25%.
Franklin FTSE United Kingdom ETF has gained 3.08% over the past three months and 12.52% over the past year.
First Trust United Kingdom AlphaDEX Fund (FKU)
iShares MSCI United Kingdom Small-Cap ETF seeks to track the performance of the NASDAQ AlphaDEX United Kingdom Index with a basket of 76 securities. The fund has gathered an asset base of $67.3 million and charges an annual fee of 0.80%. FKU has a dividend yield of 3.69%.
iShares MSCI United Kingdom Small-Cap ETF has gained 2.65% over the past three months and 18.64% over the past year.
iShares MSCI United Kingdom Small-Cap ETF (EWUS)
iShares MSCI United Kingdom Small-Cap ETF seeks to track the performance of the MSCI United Kingdom Small Cap Index with a basket of 231 securities. The fund has gathered an asset base of $62.8 million and charges an annual fee of 0.59%. EWUS has a dividend yield of 2.75%.
iShares MSCI United Kingdom Small-Cap ETF has gained 1.64% over the past three months and 12.41% over the past year.
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Franklin FTSE United Kingdom ETF (FLGB): ETF Research Reports
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