Casual evidence suggests it would be bad news, because slower growth is usually accompanied by lower equity returns. Since January 1994, the correlation between annual changes in the All-Share index and in manufacturing output has been a hefty 0.56, with each percentage point of slower output growth associated with 2.5 percentage points lower equity returns.
However, the emphasis here is on "associated". This correlation exists partly because UK equity returns and manufacturing output are both highly correlated with global economic conditions. If we control for changes in US manufacturing output, the sensitivity of equity returns to UK output halves.
What's more, the correlation between All-Share returns and the gap between UK and US output growth is negative. This tells us that UK equities tend to do well when the UK grows more slowly than the US.
This could be because if the US is doing well and the UK less so, UK equities get a double benefit. They get a boost from the positive global investors' sentiment caused by a healthy US economy, whilst also benefiting from the tendency for weak growth here to reduce interest rate expectations.
Herein lies good news for equity investors. Economists expect US growth to pick up next year: Bank of America Merrill Lynch forecasts 3.3 per cent GDP growth, after 2.3 per cent growth this. If history's any guide, this should support UK shares.
You might object here that decent US growth should be already discounted by the markets, in which case it's no comfort. I'm not so sure. Economic growth doesn't support shares merely by boosting corporate earnings. It also increases' investors' appetite for risk. However, people tend to be bad at predicting their future tastes: we are prone to a projection bias which makes us under-estimate future changes in our preferences. This means that whilst the impact of growth upon earnings might be already discounted by shares, the impact on risk appetite might not be.
Instead, there's another reason to doubt whether decent US growth will support UK equities during a domestic slowdown. It's that political risk could increase. Even a modest slowdown, if accompanied by some pick-up in productivity growth, might cause unemployment to rise. This could further increase discontent with the political establishment. Whether this manifests itself in demands for public ownership or a living wage, or withdrawal from the European Union, it might mean increased political uncertainty. And this, in itself, is bad for equities.
In this sense, perhaps, even a quite mild slowdown contains risks which aren't fully captured by historical statistical relationships.
