Views on 2017
2016 was full of political surprises. 2017 may be the year of economic surprises. The UK and world economy could surprise on the upside. Perhaps not by much, but by enough to matter and for investors to notice. There is, after all, considerable uncertainty about what lies ahead.
The UK has suffered from a bout of pessimism among most economists and establishment figures since the June Referendum. Even the Chancellor has given the impression of having to make the best of a bad job. So much so that this threatens the outlook in 2017, by triggering a self-feeding downturn, deterring people from spending and firms from investing. This helps explain why many forecasters expect investment to fall next year. It should be said that the same thinking fed pessimistic forecasts for the post Referendum period too, but since then growth has been resilient.
Before the Referendum I felt that if the country voted to Leave, then the pound and interest rates would fall and the economy would grow solidly through the rest of the year. That has happened. Also I forecast the economy might lose some momentum in 2017 because of all the uncertainty associated with leaving the EU but it would still grow steadily. Since then, helped by Trump's victory, the international outlook looks stronger. This should help the UK do better next year than I previously thought, directly by boosting exports and indirectly via the impact on financial markets and on higher investment.
I think UK growth will be just over 2% in 2017. According to the Treasury, the range of forecasts made in the last three months is from a fall of -0.3% to a rise of 2.8%, with a median of 1.0%. At the Autumn Statement, the independent Office for Budget Responsibility forecast that after growth of 2.1% this year, the economy would grow 1.4% in 2017 and 1.7% in 2018. The margin of error in economic forecasts is high and higher still when it comes to government spending, tax revenues and the budget deficit.
That budget deficit still weighs on UK policy, although fiscal policy looks set to be slightly looser to help fund infrastructure spending, in addition to previously announced tax cuts. The current account deficit, meanwhile, has already contributed to a fall in sterling, and may start to improve in coming years helped by exports and a healthy balance in services.
The weaker pound, though, will contribute to higher inflation in 2017 because of increased import prices. However, domestic cost pressures still remain subdued. Firms may absorb some of the rise in input costs by squeezing their profit margins as they seek to retain market share. Thus, the rise in inflation is likely to be temporary, and by the second half of next year it should be falling. By the fourth quarter consumer prices may be just above the 2 per cent inflation target, falling below it at the start of 2018.
I do not expect the Bank of England to raise rates in 2017, but as the year progresses they may need to start exiting from their current monetary stance. This would require a reversal of their buying of corporate bonds and exiting from quantitative easing. Money market rates may start to rise, in anticipation of small rate increases in 2018. Led by a change in thinking in the US, I would not be surprised to see a renewed focus on the need for a return to monetary discipline in the UK too.
Of course, given that household borrowing, as well as house prices, are sensitive to higher rates this process may be a gradual one in the UK. Indeed, household borrowing may rise in 2017 as the labour market is still strong, and this will help underpin consumer spending. A weaker pound, meanwhile, has made the UK attractive for inward investment and this should continue.
The Government looks set to trigger Article 50 before the end of March. Although the political focus and media interest will be intense, the reality is that it should not directly impact current business during 2017. Naturally, how the UK positions itself is key. In my view, it remains a great opportunity, not least for The City that now faces a huge competitive challenge from a future deregulated Wall Street. Also, expect to see the UK try to build global ties during 2017.
A host of countries have seen change at senior political levels in recent years, notably the UK in 2016 and the US, where the new administration takes over in the new year. The next twelve months also sees key elections in the Netherlands, France and Germany. And while change is not certain, all are expected to influence the economic and investment climate for the Eurozone. So it remains a period of political flux and potential policy change in Europe and uncertainty for Eurozone assets.
The most significant global issue in 2017 will be the extent to which President Trump succeeds in reflating the US economy. The financial markets have already discounted much good news on this front: tax cuts, infrastructure spending, deregulation and business friendly changes. Signs of potential success may emerge early in the year and if so keep the dollar firm and equity markets underpinned. In particular, the dollar may be particularly strong versus the yen and euro. While sterling may be soft versus the dollar, it should be firm versus the euro.
The US Fed, having raised rates in December 2016, looks likely to tighten again in 2017. It is premature to suggest that this is the start of a bear market for bonds. Far from it. Global inflation still remains low. But it may suggest that yields, in the UK and at a global level, may not retest recent lows.
Oil and commodity prices will have a big bearing on that inflation outlook. Global oil prices may end next year around $60 to $70 as ample supply mitigates still firm demand. In 2017 the key global relationship will be China-US. China faces political change and modest growth. But market attention will be on its credit growth and on its trade and new political relationship with the US.
While all these issues will unfold over the next twelve months, there will be ongoing progress in the fourth industrial revolution, which is already underway. It points to profound, longer term positive change for the world economy. Economies need to be flexible enough to benefit from this, and investors need to take a long term view to appreciate the potential. From artificial intelligence, to 3D remote printing, biotech and life science changes through to robotics and financial technology, future change and economic growth may yet surprise on the upside. In 2017, however, investors need to keep their feet on the ground, with an eye on the fundamentals, policy and confidence.
The UK has suffered from a bout of pessimism among most economists and establishment figures since the June Referendum. Even the Chancellor has given the impression of having to make the best of a bad job. So much so that this threatens the outlook in 2017, by triggering a self-feeding downturn, deterring people from spending and firms from investing. This helps explain why many forecasters expect investment to fall next year. It should be said that the same thinking fed pessimistic forecasts for the post Referendum period too, but since then growth has been resilient.
Before the Referendum I felt that if the country voted to Leave, then the pound and interest rates would fall and the economy would grow solidly through the rest of the year. That has happened. Also I forecast the economy might lose some momentum in 2017 because of all the uncertainty associated with leaving the EU but it would still grow steadily. Since then, helped by Trump's victory, the international outlook looks stronger. This should help the UK do better next year than I previously thought, directly by boosting exports and indirectly via the impact on financial markets and on higher investment.
I think UK growth will be just over 2% in 2017. According to the Treasury, the range of forecasts made in the last three months is from a fall of -0.3% to a rise of 2.8%, with a median of 1.0%. At the Autumn Statement, the independent Office for Budget Responsibility forecast that after growth of 2.1% this year, the economy would grow 1.4% in 2017 and 1.7% in 2018. The margin of error in economic forecasts is high and higher still when it comes to government spending, tax revenues and the budget deficit.
That budget deficit still weighs on UK policy, although fiscal policy looks set to be slightly looser to help fund infrastructure spending, in addition to previously announced tax cuts. The current account deficit, meanwhile, has already contributed to a fall in sterling, and may start to improve in coming years helped by exports and a healthy balance in services.
The weaker pound, though, will contribute to higher inflation in 2017 because of increased import prices. However, domestic cost pressures still remain subdued. Firms may absorb some of the rise in input costs by squeezing their profit margins as they seek to retain market share. Thus, the rise in inflation is likely to be temporary, and by the second half of next year it should be falling. By the fourth quarter consumer prices may be just above the 2 per cent inflation target, falling below it at the start of 2018.
I do not expect the Bank of England to raise rates in 2017, but as the year progresses they may need to start exiting from their current monetary stance. This would require a reversal of their buying of corporate bonds and exiting from quantitative easing. Money market rates may start to rise, in anticipation of small rate increases in 2018. Led by a change in thinking in the US, I would not be surprised to see a renewed focus on the need for a return to monetary discipline in the UK too.
Of course, given that household borrowing, as well as house prices, are sensitive to higher rates this process may be a gradual one in the UK. Indeed, household borrowing may rise in 2017 as the labour market is still strong, and this will help underpin consumer spending. A weaker pound, meanwhile, has made the UK attractive for inward investment and this should continue.
The Government looks set to trigger Article 50 before the end of March. Although the political focus and media interest will be intense, the reality is that it should not directly impact current business during 2017. Naturally, how the UK positions itself is key. In my view, it remains a great opportunity, not least for The City that now faces a huge competitive challenge from a future deregulated Wall Street. Also, expect to see the UK try to build global ties during 2017.
A host of countries have seen change at senior political levels in recent years, notably the UK in 2016 and the US, where the new administration takes over in the new year. The next twelve months also sees key elections in the Netherlands, France and Germany. And while change is not certain, all are expected to influence the economic and investment climate for the Eurozone. So it remains a period of political flux and potential policy change in Europe and uncertainty for Eurozone assets.
The most significant global issue in 2017 will be the extent to which President Trump succeeds in reflating the US economy. The financial markets have already discounted much good news on this front: tax cuts, infrastructure spending, deregulation and business friendly changes. Signs of potential success may emerge early in the year and if so keep the dollar firm and equity markets underpinned. In particular, the dollar may be particularly strong versus the yen and euro. While sterling may be soft versus the dollar, it should be firm versus the euro.
The US Fed, having raised rates in December 2016, looks likely to tighten again in 2017. It is premature to suggest that this is the start of a bear market for bonds. Far from it. Global inflation still remains low. But it may suggest that yields, in the UK and at a global level, may not retest recent lows.
Oil and commodity prices will have a big bearing on that inflation outlook. Global oil prices may end next year around $60 to $70 as ample supply mitigates still firm demand. In 2017 the key global relationship will be China-US. China faces political change and modest growth. But market attention will be on its credit growth and on its trade and new political relationship with the US.
While all these issues will unfold over the next twelve months, there will be ongoing progress in the fourth industrial revolution, which is already underway. It points to profound, longer term positive change for the world economy. Economies need to be flexible enough to benefit from this, and investors need to take a long term view to appreciate the potential. From artificial intelligence, to 3D remote printing, biotech and life science changes through to robotics and financial technology, future change and economic growth may yet surprise on the upside. In 2017, however, investors need to keep their feet on the ground, with an eye on the fundamentals, policy and confidence.
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