Things have been looking okay for the US’ overall economy, and with implementing change in Washington, who knows what’s to be of the economy in months to come. Samuel E. Rines, Senior Economist and Portfolio Strategist at Avalon Advisors LLC discusses for Finance Monthly below.
The US economy currently finds itself in a familiar position. Following a weak start affected by statistical anomalies and an absent consumer, the economy is beginning to find its footing. But this does not mean that the US economy is going to suddenly take-off. On the contrary, the US economic outlook is heavily reliant on decisions made in Washington.
Recently, manufacturing, employment, and personal consumption indictors have been generally positive. While headline job creation in May was disappointing, jobless claims and other indicators of labor market stress have been subdued. There are certainly areas of the US economy that are less encouraging. Inflation and lackluster wage growth remain conundrums of sorts given the extremely low unemployment rate. Most economic models would have wages and inflation accelerating at these levels.
Taken together, the current state of the US economy is much the same as it has been for the past several years: not too hot, not too cold. Slow and steady growth around the post-recession trend growth of around 2 to 2.5%. Nothing to become too excited about, but also fast enough to generate sustainable growth. There are reasons to suspect the US economy will significantly accelerate its pace of growth in the second half.
While little has changed for the US economy so far in 2017, numerous events and policies could alter the trajectory over the next year or so. The most important are the Trump Administration’s promised tax breaks and fiscal policies, closely followed by the Federal Reserve’s policy decisions. And, in many ways, the two are related.
Following the election of President Trump, the markets cheered these pro-growth policies as yields on US government debt rose and equity markets made all-time highs. But some of this initial optimism—euphoria even—has dissipated. At least partially, this is due to the declining potential for timely fiscal policy changes. It has taken GOP members of Congress and the Senate far longer to come to agreement on what their version of the healthcare bill should be than markets anticipated.
The importance of the healthcare bill, and, the drawn out debate surrounding it, are difficult to overstate. To do meaningful tax reform, the healthcare reform must be completed first as there are taxes and costs embedded in the ACA law that the GOP deal with before it can fully rework the tax code. And reducing the costs within the ACA is critical to freeing up fiscal room to maneuver greater tax breaks than would otherwise be achievable. Until healthcare is completed, tax reform is on the backburner.
Further reducing prospects of growth boosting initiatives are the significant headwinds Trump Administration faces to implementing its agenda. Many of the headwinds are likely to pass over time, but that is precisely the problem—time. Unless there is a significant acceleration in the pace of legislation, tax reform now appears to be a late 2017 or early 2018 catalyst.
Because of this extended timeline, markets may be forced to refocus on the Fed’s policy trajectory. The Trump Administration’s fiscal policies are incorporated into economic projections used to recommend monetary policy changes. Simply, policy timing matters—not only for markets and the economy—but also for the evolution of the Fed’s monetary policy.
For markets, tax and infrastructure are imperative: the lower the taxes, the greater the after tax profits, and the higher the valuations. That dynamic is undeniably a positive for markets. Infrastructure spending would boost revenues for companies associated with building the nation’s infrastructure. Not only in the common sense of infrastructure, but communications, electrical grid, and other areas in need of national investment—again, a positive for markets. The only outstanding issue is when the positives might arrive.
One of the odd dynamics for US growth is that “good enough" growth is likely to prove "good enough" for a couple more Fed rate hikes this year. In the absence of fiscal policy, this could cause some issues for markets with growth and Fed tightening awkwardly out of sync. The evolution of politics in Washington will have a direct, and uncomfortable, influence on both. The US economy will be heavily, if not solely, reliant on Washington for its direction for the next couple of years.
With the election on our doorsteps, Jonathan Watson, Chief Market Analyst for Foreign Currency Direct talks to Finance Monthly about the potential impact of the UK’s general election on the national economy and the pound.
This election has gone from being one of the most predictable to actually quite an uncertain event. With this shift in outlook we have unsurprisingly seen the Pound too, go from fairly stable to displaying the more predictable behaviour caused by political uncertainty. Whilst Theresa May remains the favourite, the potential for surprise is high as polls in recent years have been anything but reliable. With the Conservative lead having fallen from as much as 20 points to less than 1 point in some cases, the market is having difficulty pricing in the news and possible outcomes. On Friday we could easily be looking at a slim Labour victory or a Conservative landslide. I am personally expecting a small improvement on the current Conservative majority of 17 which could call into question Theresa May’s decision to hold the election in the first place if not sufficient for a Conservative win
Elections are by nature uncertain events as they raise the prospect of a change in the Government responsible for setting taxes, spending and economic policies. Elections also take time, and often consumers & business delay important decisions to wait for the outcome.
The UK election must also be viewed against the backdrop of Brexit, without which we would not be having this election. The main reason it has been called is, according to Theresa May, to improve her negotiating position. Critics suggest other tactics but where Theresa May has framed the election about Brexit and many feel she is the right person to handle those negotiations, Labour have however made the election about austerity and played some strong cards to appeal to voters.
Free tuition fees and free school lunches as well as increases in government spending are all designed to appeal to the masses and could well earn Labour extra support. Such plans, if they come to fruition could certainly see Sterling lower, as the Pound performed very badly in the run up to both the 2010 and 2015 elections when it looked like Labour may win and they pledged to increase spending as they have now.
Mrs May and the Conservative party aren’t perfect, having also failed to spark much imagination with their policies performing a series of U-turns and failing to provide clarity on taxation policies. Whilst committing to being a ‘low-tax party’, they haven’t explicitly promised not to raise taxes. Theresa May’s U-turn on the issue of social care, and indeed her decision to call an election have also contributed to her slide in both the polls and approval ratings.
The spate of terror incidents we have seen lately are another factor weighing on the market. Terror attacks typically cause a currency’s value to fall, and whilst Sterling had fallen, the Pound actually found favour as markets felt that voters would believe Theresa May could be better placed to handle such incidents.
Market participants, investors, businesses and consumers all contribute more effectively to society when there is confidence and certainty. The run-up to an election is by its nature uncertain, hence the fall in Sterling value, particularly with Theresa May having previously looked so likely to win by a considerable majority. If the polls are right and the lead has narrowed the result is likely to see the Pound decrease in value based on those previous expectations.
This election is absolutely critical to shaping Brexit negotiations. Theresa May might also end up looking foolish for calling the election. There is the outside chance of her losing power either through losing the Conservatives’ power or being forced to step down if they lose. My belief however, is that the Tories will have done enough to boost their majority but not to the extent we previously believed. Nevertheless this may be enough to boost the Pound and provide a little more certainty over the Brexit.
Every NATO country contributes to the costs of running the Alliance. By far the biggest contribution comes from Allies’ taking part in NATO-led missions and operations. For example, one country might provide fighter jets, while another provides ships or troops. NATO Allies also pay directly to NATO to cover the costs of NATO staff and buildings, its Command Structure, and its jointly-owned equipment, like its AWACS aircraft.
In recent news Donald Trump praised Saudi Arabia for fighting extremism in the region and said he was the one to make North Atlantic Treaty Organisation (Nato) members spend more on defence.
In addition, cyber-attacks are becoming more common, sophisticated and damaging. Cyber defence is now a top priority for NATO. NATO now recognises cyberspace as an ‘operational domain’ – just like land, sea and air. NATO helps Allies to boost their cyber defences by sharing information about threats, investing in education and training, and through exercises. NATO also has cyber defence experts that can be sent to help Allies under attack.
Growth expectations for 2017 remain at 2.0%, according to the Fannie Mae Economic & Strategic Research (ESR) Group's May 2017 Economic and Housing Outlook. For the fourth consecutive year, first quarter US growth slowed from the fourth quarter, partly reflecting ongoing seasonality issues. However, incoming data suggest that consumer spending growth will pick up this quarter.
Meanwhile, businesses will likely increase production in an effort to rebuild inventories, turning inventory investment into a positive for, instead of a large drag on, growth. Given the tight labor market, the ESR Group continues to expect rate hikes in June and September. Housing was a bright spot during the first quarter, and home sales performed well going into the spring season, thanks to solid labor market conditions and a recent retreat in mortgage rates.
"Once again, our full-year growth forecast remains intact as the economy grinds along, with the prospect of material policy changes appearing to be delayed," said Fannie Mae Chief Economist Doug Duncan. "We expect consumer spending to resume its role as the biggest driver of growth in the second quarter amid improvements in the labor market. Positive demographic factors should continue to reshape the housing market, as rising employment and incomes appear to be positively influencing millennial homeownership rates. However, the tight supply of homes for sale continues to act as both a boon to home prices and an impediment to affordability."
Visit the Economic & Strategic Research site at www.fanniemae.com to read the full May 2017 Economic Outlook, including the Economic Developments Commentary, Economic Forecast, Housing Forecast, and Multifamily Market Commentary.
(Source: Fannie Mae)
America's economy can return to the days of 3% and higher annual growth rates if Washington embraces pro-growth economic policies, concludes the latest installment of Pacific Research Institute's Beyond the New Normal series released last week.
"Nothing impacts America's economy more than government economic policy," said Dr. Wayne Winegarden, PRI Senior Fellow in Business and Economics, and co-author of Beyond the New Normal. "Reviewing 60 years of economic policies, we found that when government embraces policies that incentivize growth, our economy grows. President Trump and Congress can bring back the days of 3 and 4% annual growth by enacting a pro-growth agenda."
In Part 4 of Beyond the New Normal, Wayne Winegarden and co-author Niles Chura analyze 4 key economic turning points where changes in the economic policy mix impacted the health of the US economy (covering the periods 1958-1970, 1970-1982, 1982-2001, and 2001-2015). Following a historical review of the economic policy mix during each of these periods, Winegarden and Chura found that:
- Between 1958 and 2015, US economic policy alternated between periods of expanding and declining government influence in the economy.
- Changes in the government's economic policy mix – including fiscal and monetary policy – have impacted the health of the US economy during these periods, alternating between times of weaker structural economic growth and robust structural economic growth.
- The Trump Administration would be wise to take a long-term economic view, embracing a policy mix that adds long-term value to the economy. They should avoid the temptation to use economic policy to manage short-term economic conditions, stimulate growth during recessions, or reduce growth during expansions.
- Policies that create growth-enhancing incentives, production efficiency, and prices that accurately reflect supply and demand encourage strong economic growth. These polices were in place during the 1960s, and the 1980s through the 1990s.
- In contrast, policies that distort prices, decrease the incentive to take risks, and increase government spending discourage growth. These policies have been in place since 2001, and were also prevalent during the 1970s.
Beyond the New Normal is a multi-part study by Dr. Wayne Winegarden and Niles Chura, which makes the case that future US economic growth can meet –or exceed – past growth trends if the right economic policies are adopted.
Dr. Wayne Winegarden is a Senior Fellow in Business and Economics at Pacific Research Institute. He is also the Principal of Capitol Economic Advisors and a Managing Editor for EconoSTATS. Niles Chura is the founder of Ouray Capital.
(Source: Pacific Research Institute)
Finance executives are less optimistic about the economy entering the second quarter of 2017 than they were entering 2017, according to the AFP April 2017 Corporate Cash Indicators.
In the latest CCI, a quarterly survey of corporate treasury and finance executives conducted by the Association for Financial Professionals, US businesses continued to build their cash reserves in the first quarter of 2017. This was not what they anticipated at the beginning of the year. Last quarter, finance executives suggested that they were, for the first time in many months, willing to deploy cash in Q1. However, new numbers reveal they did otherwise. The quarter-over-quarter index of +15, which measures actual changes in cash balances during the quarter, contrasts with the anticipated change for Q1 of -7 that was reported last quarter. The +15 reading was just one point lower than a year ago. The year-over-year indicator increased by 6 points to +16, showing that companies have continued to accumulate cash over the last 12 months.
The forward-looking indicator, measuring the expected change of cash holdings during the second quarter of 2017, increased 10 points to a reading of +3, signalling a continued softening in finance professionals' business confidence through the spring and an anticipated increase in cash holdings in the coming quarter. This was four points below its reading from a year ago.
Meanwhile, the indicator for short-term investment aggressiveness gained one point in the last quarter moving from -2 to -1, continuing to signal a more conservative posture with cash and short-term investments. These results are based on 212 responses.
In early 2017, for the first time in many months, finance professionals displayed a new sense of optimism about the economy, which AFP attributed to a new president promising a pro-business agenda. However, continued gridlock in Washington, plus heightened geopolitical risk in Syria and North Korea likely dampened the mood of finance executives.
"The rapid change in finance executives' outlook comes as little surprise given the sudden rise in economic and political uncertainty," said Jim Kaitz, president and chief executive of AFP. "Corporate treasury and finance executives are responding quickly, and prudently, to the new environment."
(Source: Association for Financial Professionals)
Somalia faces numerous challenges on its quest for peace, stability, and economic prosperity. The recent drought and famine will test the country's resilience to provide humanitarian assistance and will require help from the international community. The government's recent policies demonstrate its strong commitment to improving the state of the country and Somalis' livelihoods.
Here are five things to know about Somalia's economy since the country resumed relations with the international community five years ago.
The drought is severely affecting vulnerable populations. The harsh impact of the ongoing drought on the agricultural sector has put about 6.2 million people (about half the Somali population) in need of assistance and at risk of food insecurity, prompting an urgent need for humanitarian and financial assistance from the government and the international community. The government will also need to better coordinate and monitor humanitarian aid distribution amid security challenges across some regions with a focus on the most affected regions.
Somalia is a fragile state, located in the horn of Africa, that has emerged from a two-decade-long civil war that caused significant damage to the country's economic and social infrastructures. In 2012, the Federal Government of Somalia was elected and recognized by the international community. Postwar conditions continue to be difficult, however, with poverty widespread and weak institutional capacity.
Donors' support is key. The Somali economy is sustained by donors' grants, remittances, and foreign direct investment mostly by the Somali diaspora. Since 2013, the donor community has given over $4.5 billion in humanitarian and developmental grants, which is essential in contributing to finance Somalia's trade deficit of nearly 55 percent of GDP (average during 2013-16). The current drought is expected to slow economic activity and raise inflation this year, thereby making donor support all the more critical to sustain growth.
Tackling unemployment is crucial for political stability. The unemployed youth population (about 67 percent) contributes significantly to irregular migration and participation in extremist activities, including Al-Shabaab—the militant jihadist group—which is viewed as another form of employment. With very high youth unemployment and low overall labor force participation (particularly by women), the Somali authorities established the National Development Plan that focuses on the following key areas: how to achieve higher economic growth, create jobs, and absorb the Somali refugees returning from Kenya; remittances flows; and prioritizing social safety nets and pressing humanitarian conditions.
Preparations for currency reform are under way to help strengthen governance . As part of a wider Somali reform initiative, the Central Bank of Somalia and the Federal Government of Somalia are preparing to reissue new Somali shilling banknotes—for the first time in 26 years—to combat the existing massive counterfeiting in the country, restore confidence in the national currency, and to allow the central bank to start implementing monetary policy. The IMF is helping the authorities to implement the measures that need to be in place for the launch of the new currency.
The IMF is working closely with Somalia. Since resuming its relationship with the country in 2013, the IMF has concluded two annual economic assessments—the first in 2015—marking the first IMF consultation with the country since 1989. Because Somalia is in arrears with the IMF it cannot benefit from IMF loans; however, the authorities have engaged with the IMF in the context of a 12-month staff-monitored program. This has helped create a framework to support Somalia's economic reconstruction efforts, rebuild institutional capacity, and establish a track record of policy and reform implementation. The first review of this program was completed in February 2017.
Technical assistance is helping. Somalia is among the largest beneficiaries of IMF technical assistance—which helps build institutional capacity—receiving over 70 technical assistance and training missions since 2014. Tangible progress is being made in budget preparation and fiscal reporting, currency reform, and financial sector reporting and licensing. For example, the authorities have been able to prepare a national budget for 2014-2017 and since January 2015, the government produced its first monthly fiscal reporting data. Starting from a very low capacity and a mix of Islamic and western accounting systems, central bank staff have developed a bank licensing framework, methods for periodic reporting by commercial banks, a system for bank financial analysis, and a supervisory scoring system that monitors the overall health of a bank. As Somalia continues to engage more with the international financial institutions, the IMF will deepen and scale up its capacity-building efforts as necessary.
(Source: International Monetary Fund)
Following last week’s initiation of the Brexit process via the triggering of Article 50 of the Lisbon Treaty, Finance Monthly hears from Chief Market Analyst of Currencies, Jonathan Watson, who portrays a watchful outlook on the months to come, and how the tide can easily turn in the face of socio-political tiptoeing.
This week the triggering of Article 50 marks an important phase in the Brexit process. It is the beginning of the legal process by which the UK will leave the EU, signalling an end to months of uncertainty as to whether Brexit will happen. It is also the beginning of a whole new set of questions relating to the Brexit and how it will impact both the UK and the EU. From a currency perspective, I believe the Pound will have further to fall as the reality of some tough negotiations ahead weigh more on the UK. Nevertheless, Theresa May’s steely determination and clear vision has won her lots of support and indeed helped Sterling back from the brink earlier this year. Whilst I wonder whether such tenacity will be enough for such a monumental task ahead, I am also reminded that recent events have so often proved the more literal analysis of many of the negatives of Brexit have been proved wrong so far. It is still early days but it is in everyone’s interest to make this work and to remain hopeful for the future.
The UK economy is performing significantly better than feared which is extremely encouraging for the future. The weaker Pound has driven growth in firms who export as the discounted UK represents a good investment. However, the weaker Pound has pushed up import prices and costs across the UK from supermarkets to manufacturers, which is gently being absorbed into the wider economy.
The falling Pound has also led to a rise in Inflation which paradoxically, has seen Sterling higher as Bank of England policymakers debate whether or not to raise interest rates. Therefore, fears over higher inflation may not be such a problem, as rising interest rates may help the UK avoid any of the negatives associated with high inflation. Once Article 50 is triggered I can see Sterling falling as the complexity of negotiations becomes apparent. Nothing will happen quickly, already it has been made clear that the ‘Brexit bill’ must be agreed before negotiations commence. Trying to get all 27 members to agree one coherent position will also hinder time frames. France and Germany will also have elections to contend with this year.
These roundabouts and diversions on the path to Brexit will make life very difficult for Theresa May and the UK Government. All of this can very easily be seen to be damaging for the UK economy and Sterling. A lower Sterling is generally not a good thing for the UK as since we are a net importer (we import more form overseas than we export) a weaker Pound makes life more expensive for the UK as a whole.
However, I cannot help but be troubled by some of the looming questions and uncertainties arising from Brexit. A falling out with your biggest trading partner is never going to be completely without risk and the unpicking of some deep rooted social, political and economic ties is not good for business and confidence.
Whilst the resilience and flexibility of the UK economy coupled with Theresa May’s vision is gently receiving the backing of financial market, things can change very quickly. This leads me to suspect that whilst perhaps the worst fears will continue to be abated, longer term there could be greater challenges ahead which will harm the UK economy until we have clarity and certainty.
Business and consumer activity thrives when there is confidence and certainty, Brexit represents a massive change in the status quo which goes against what we know from a fundamental view.
Like it or loathe it, Brexit is happening and we must all come together and embrace it to make the very best of it. Business should be looking to make the most of Britain’s new place in the world but also remain cautious and plan for troubles ahead.
A parliamentary report has recently revealed that a third of the working-age UK population has less than £100 in savings. That’s a reputed 17 million people who are scarily exposed to the proverbial rainy day. Here, Marcus Hernon, Client Partner at 23red, talks Finance Monthly through his own thoughts and the implicating factors leading to a nation of non-savers.
This fact sits uncomfortably alongside the figures on indebtedness (defined as when people find the weight of their debts a burden and when they regularly fall into arrears), which estimates one in six of us to be in that situation. The story is similar in the States too, with a reported half of Americans having less than $400 to fall back on.
With inflation reaching 1.8% last month (its highest point in two and half years), there are now only a limited number of savings accounts that can match or beat this. Is this the reason why we’ve become a nation of ‘non-savers’?
There are many complex factors that impact on whether people spend or save and in what quantities. Derek Thomspon explores some of the wider socio-economic reason in his thought-provoking essay from 2016. There are troubling macro-economic factors at play here, not least the continual slashing of savings rates and global political and economic uncertainty. And it is important to note that there are some people for whom saving ay money at all is simply not an option as they struggle to meet even their most basic needs. However, our reluctance to save started some time back and at the heart of the issue is that we have fallen out of the savings habit. Psychology has had a long fascination with why, in the face of all rational imperatives to save, people can’t seem to make it a priority. Thompson opts for a paternalistic, legislative approach which almost certainly has merit and in fact the Help To Save scheme soon to be launched in the UK is a good example of a Government taking very direct action. But there is clearly a role for behavioural intervention too.
Economist Richard Thaler has conducted ground-breaking work in this area. Most notably the Save More Tomorrow initiative leveraged hyperbolic discounting to get people to sign their future selves up to saving more. It is a fascinating use of a deep behavioural truth and one which has since been explored by the Behavioural Insights Team in the UK.
Brands too are wising up to the potential of behavioural nudges to help people spend less or save more. Lloyds Bank in the UK were one of the forerunners in this field with their Save the Change product which allows users to round up the price of purchases with the difference being added automatically to their savings account. This works so well because it is easy and frictionless, after the initial set-up the mental processing it requires is low enough to subvert even the most adamant non-savers. Digit is based on the same premise and has been widely associated with short term abstinence campaigns (such as Lent or Dry January). The lightness of tone and beautiful design both help to make saving feel achievable and the regular text updates about the saver’s balance deliver a welcome hit of positive reinforcement.
New entrants like Acorn in the US and MoneyBox and True Potential in the UK use a similar low involvement model to help people make investments. These models lean heavily on the behavioural theory of small manageable amounts that can be invested on the move. With a reported (by Mintel) one third of Brits having no interest in financial planning – products that require minimal attention but can still yield results are a very compelling way to tackle the issue.
The continuing lack of trust in financial institutions is likely playing a role. But there is little to correlate in the data between declining trust in banks and reduction in individual savings. It is more likely that this is acting as a conformation factor, with people ascribing their own, less conscious ability to save to a feeling of being let down by the financial industry. Regardless, this creates a void for which newer, more agile brands and products can provide innovative solutions that feel more attuned to today’s would-be saver. It will be interesting to see how the establishment reacts and whether they are fleet of foot enough to keep up.
Canada's economic progress has been driven by its historical preference for openness to people, capital and trade, Bank of Canada Governor Stephen S. Poloz has said.
In a speech marking both the 150th anniversary of Confederation and the 50th anniversary of Durham College, Governor Poloz looked at Canada's economic history and showed how all periods of substantial progress have been characterized by openness in these three areas. "The bottom line of our history is that openness and economic progress go hand in hand," Governor Poloz said.
While support for openness has ebbed and flowed over the years depending on circumstances, Canada's economic roots have meant that a preference for openness has tended to re-emerge, the Governor said. For example, the colonies that united at Confederation benefited from open trading with the United States before 1867. When they lost free access to the US market, Confederation became the strategy they employed to help the economy develop.
Canada's ascent also depended on people who understood the need for infrastructure to get resources to market, and how to attract the investment to finance these projects. "The people who developed what has become the world's soundest banking system were vital to Canada's development," the Governor said. Open markets, foreign investment and immigration remain absolutely critical for Canada today, Governor Poloz said.
Fears of openness are heightened during times of economic stress, the Governor added. However, experience has shown that such fears are misplaced.
"Our history shows that it takes a world to raise a nation, and nation building works best in an environment of openness for trade, people and investment," Governor Poloz said. "Our openness has helped us build a nation that I believe is the best place to live in the world. Imagine what we can build over the next 150 years."
(Source: Bank of Canada)
Despite finishing 2016 reasonably strongly, the outlook is bleak as the weak pound continues to push up inflation. The UK risk outlook is expected to deteriorate still further from the two downgrades made since the EU referendum, and although uncertainty looms, the immediate impact of the vote has already taken shape. But what about its impact in the long term?
To answer the question about what Britain’s industries, markets, and sectors beyond financial services will be affected in the long run, Finance Monthly has heard ‘Your Thoughts’, and formulated a rundown of your expert opinions on what to expect months, even years from now.
Charles Fletcher, Head of Analysis, Cogress:
We’ve now entered the month Theresa May pledged to trigger Article 50 and initiate the UK’s exit from the European Union (EU). This means it’s time to critically assess the long-term impact of Brexit on the UK’s property market. The shocking result of the 2016 June referendum introduced a greater degree of uncertainty to the UK economy and property market. The weakened sterling and rising consumer inflation combined with the higher stamp duty tax has meant buyers, investors, and developers are exercising more caution.
Over the next few years, weaker economic growth and increasing pressure on spending power will undoubtedly dampen some housing demand and consequently, lower house price growth rates. It’s hard to predict what the long-term effects of Brexit without knowing the kind of trade deal we secure with the EU. However, that’s not say there aren’t already signs giving us an indication of what the future of the property market will look like. In fact, the latest Halifax House Price Index showed just how resilient UK property prices have been in the face of multiple tax changes and the looming Brexit. There’s good reason to be cautiously optimistic about what the state of the property market ten years on from Brexit.
Firstly, low levels of supply will continue to buoy housing prices and stoke buyer demand across the UK. People looking for better yields and investments will look for new locations as business slows in central London. This means we’ll see greater interest in areas & cities outside inner London like Oxford, Cambridge, Manchester, and Bristol. Compounding this is the vulnerable, depreciating pound that has made the exchange rate on UK property very favourable for foreign buyers in China and the Middle East. Even if domestic and EU buyers remain indecisive about whether to dive into the property market, many other foreign buyers see central London and other UK cities as stable property assets in the long-term.
We have also heard overblown fears over the number of banking and business jobs that the country will lose when we exit the EU. The UK remains one of the top three cities to invest in (behind the US and China), partly attributed to London’s global position as a leading business and cultural hub. While Brexit may have some influence, there is no evidence to suggest that London’s position is likely to change in any dramatic fashion over the next ten years. As the indicators for our nation’s economy continue to be strong, we will see the same in the property market.
While 2016 made clear the prediction game is never certain, the strong fundamentals of the UK’s property market will help it navigate the short-term volatility Brexit will bring to our economy. Meaning Brexit is actually an opportunity for buyers & investors willing to take the long-term view on a market that has historically been the nation’s most resilient in times of turbulence.
Jim Prior, CEO, The Partners:
Brexit has not yet happened and its terms are currently completely unknown so it’s impossible to predict how long its effects will last. What we may be able to predict, however, is the effect of the period of post-referendum, pre-Brexit limbo that we are in and likely to remain in for some years.
On that, although there are good arguments to the contrary, I am choosing to take an optimistic view. I predict that in the next few years, British businesses will act with caution but will find themselves periodically surprised by the resilience of the economy and the enthusiasm of the British consumer and, in that light, will be sufficiently reassured to invest more then they currently expect to and will find growth and profit ahead of forecast.
Beyond that, as elections take place across Europe and the Donald continues to tear up the US rule book, Britain may find itself in the ironic position of enjoying a period of greater certainty than other major nations because our decision is made and our government is stable – thanks to Jeremy Corbyn’s counter-productive efforts there’s virtually no chance of a change of government here – whereas theirs are anything but. That could be good for inward investment in the short and medium term even if longer-term doubts remain.
And the long-term is by no means guaranteed to be bad: If Britain can indeed prosper calmly through the next couple of years while other economies thrash around in the political sea, we may then find that our negotiating position strengthens, and the deals we strike might be better than we initially thought. I still hate the idea of Brexit at an ideological level but, in support of democracy and national self-interest, I am looking positively ahead.
Markus Kuger, Senior Economist, Dun & Bradstreet:
A post-Brexit world is not something that is easy to predict. Currently, Pound Sterling fluctuations, inflation surges and political uncertainty are all pieces of a jigsaw that are very difficult to piece together. The consensus of an uncertain picture is therefore quite bleak, but it’s important for businesses to remain calm in this period of transition.
However, despite business’ uncertainty in a post-Brexit era, there has been cause for optimism. Global mergers and acquisitions haven’t slowed (the recent news that Sky PLC has agreed to a £18.5bn takeover by 21st Century Fox supports the claim that businesses are willing to continue in the same vein) and there has been a surge in manufacturing exports since the vote to leave the EU. However, the outlook has been gradually deteriorating since the start of the year; sales figures in the retail sector fell in December and January, while Purchasing Managers’ Indices in the manufacturing and services sectors have eased, yet still stand comfortably in growth territory.
Regardless of this, the full ripple effect of Britain’s exit from the EU has not yet been felt for one clear reason; Britain hasn’t actually left yet. But what happens after could shape the future of the country.
From a trade perspective, tariff-free access to the EU’s common market could be impacted if talks break down about a free trade agreement and World Trade Organisation (WTO) trading rules are implemented instead. This change in tariff policy could cause some challenges for UK companies involved in sourcing from the continent (as production costs would go up) or selling to it (as companies would need to increase sales prices to cover the tariffs). Positively, Dun & Bradstreet’s baseline scenario still expects trade across the Channel to be carried out tariff free once Brexit is completed.
The true financial landscape will likely not become clear until 2019, once the UK has fully exited the European Union. Financial institutions will need to take stock and react accordingly to the swaying of the financial markets which will no doubt prove problematic to begin with. Over the short run, it seems likely that the government would try to counterbalance the negative economic impact of a hard Brexit by increased spending (in order to make its policy a success and maintain public support). Over the long run however, public services (including schooling and healthcare) might have to be scaled back even further in order to reduce the excessive government deficit to more sustainable levels.
Depending on what sort of deal is struck between London and EU, it is impossible to say when the country might return to ‘normality’ again. Businesses must, however, remain calm and not panic. After the implementation of Article 50, businesses must remain cautious until the pieces of the Brexit jigsaw are slowly put together again – a process that we expect to begin after the German elections in September 2017.
Jonquil Lowe, Senior Lecturer in Economics and Personal Finance, The Open University:
Most economic forecasters are united in thinking that Brexit will make the UK worse off in the long run than it would have been staying in Europe. The reasoning tends to be that European competition has enabled the UK to specialise in what it’s good at – for example, financial services – boosting productivity, wage rates and national income. Also, the UK has benefited from foreign firms locating here as a gateway to European markets. Brexit is expected to unwind these benefits and, for now, there is huge uncertainty over what trading arrangements might replace our membership of the European club.
However, even if the nation as a whole is worse off, the impact on households is likely to be uneven. Trying to predict winners and losers is like looking into a muddy crystal ball, because it will be impossible to separate pure Brexit effects from policy responses. Crucial for households is what happens to inflation and interest rates.
Inflation is already on the rise due to a sharp fall in the pound (currently around 12% lower than its pre-Brexit-vote level [1]). This reflects reduced confidence in the UK’s economic future and pushes up the price of imported foodstuffs, oil, clothes and all the other foreign goods and services we love. Wages are failing to keep up, so household incomes are expected to be squeezed. If Brexit does reduce productivity, then depressed wages could persist for a long time.
Inflation is sometimes called a hidden tax because it erodes the value of fixed amounts of savings and debts, so tends to benefit borrowers but is bad for cash savers. The impact could be dampened if interest rates were to rise, but, so far, the Bank of England has suggested that it will not try to rein in inflation by raising interest rates because this could tend to depress economic activity and cause unemployment. However, loose monetary policy tends to push up asset prices, so households with property and equities may be winners.
Over time, the biggest Brexit effect may be shifts in employment with some households facing job loss, while at the same time new job opportunities open up. For example, the financial services sector may shrink and foreign car manufacturers may shift production elsewhere. Meanwhile, jobs with exporting firms could mushroom, since the lower pound makes the foreign price of exports more competitive. Households that are likely to benefit most are those who are willing to be flexible and go wherever the Brexit tide takes them.
[1] http://www.bankofengland.co.uk/boeapps/iadb/newintermed.asp
Howard Bentwood, Founder, Cedar:
As Brexit negotiations drag on despite the rapid approach of the ‘deadline’ to trigger Article 50, the financial world remains rife with uncertainty. Whilst news that the UK economy grew 0.7% in the fourth quarter of 2016 has been attributed by some to a ‘Brexit Bounce’, it is by no means the whole story. This better than expected economic growth has been associated with a rise in household consumption and manufacturing, with services and construction also ending the year well. However, it is worth noting that over the same period, investment was down 0.9% on the previous year and trade remained largely unchanged.
The next few months are sure to see further developments and unexpected economic revelations, as companies trade under changeable conditions. In the run up to the Brexit vote, Cedar saw many clients understandably adopting a more cautious position on hiring; many have taken an interim approach, by recruiting senior support staff on a flexible basis rather than committing to permanent headcount. Amid the turbulence of the current political and economic environment there is arguably an even greater need for top-tier expertise on the board to steer businesses through the uncertain waters. To this end, we have seen a rise in demand for interim Finance Directors, CFOs and CPOs in the last few months. Small and middle-sized companies in particular can benefit from an experienced interim practitioner who can bring their commercial acumen and insight to the table at a critical time.
In discussions with clients and staff, I often hear people wondering when things will ‘return to normal’; I believe that over time the world of finance will simply adapt to a ‘new normal’. Forward-thinking companies can be instrumental in shaping this future through the creation of their own ‘Department for Brexit’, tasked specifically with adjusting their strategy to match the new risks and opportunities faced by Britain as it exits the European Union.
Martin Campbell, Managing Director, Ormsby Street:
Trying to predict when things will be ‘normal’ again post-Brexit is nigh-on impossible. The business landscape will change forever and it is hard to see when things will go back to how they were. I suspect we will look back regretfully at our decision to leave the EU, especially given the Prime Minister now seems set on a hard Brexit. Leaving the EU will have many long-term repercussions, culturally, politically and of course economically. Europe is a key market for many UK businesses, with 96% of British SMEs who export, exporting into Europe. Being unable to trade so easily will inevitably have an impact that could last for years and years.
The uncertainty facing the business environment at the moment is very difficult and is certainly causing challenges in my business where we work with SMEs and large banks - both are playing a ‘wait and see’ game and avoiding long term commitments. But recent developments revealed in a series of interview with City of London business leaders has shown the real fear that the loss of banking jobs to EU countries could threaten financial stability across the continent. The immediate loss of a few thousand jobs is in itself not necessarily a disaster, but there could be a major knock-on effect in terms of financial stability if common regulation is not agreed with the remaining EU members.
The movement of labour across the EU has also been a real positive and there are many UK businesses who rely on the availability of a workforce with diverse skills from across the EU to grow their businesses successfully in the UK. Ormsby Street for example, now employs 12 people, three of whom are from other EU countries. Without this access to talent, future growth could come under threat and there are serious questions about how UK business can replace that talent in the long-term.
Shilen Patel, Co-Founder, Independents United:
As we head for Brexit the future of the country’s economy is naturally being called to question. But with uncertainty comes the opportunity for change and what better time for the UK to invest in its community of emerging entrepreneurial talent and product innovation?
Yes - the glamorous tech sector is in the middle of a funding frenzy, with over £6.7 billion invested into UK tech firms in 2016, but what about the country’s food and drinks sector that’s worth around a staggering £100 billion and represents manufacturing’s most profitable sector?
The fact is, as we head for Brexit, we’re going to need to stand on our own two feet and backing the full spectrum of our entrepreneurial talent will become a necessity. It will no longer be enough to invest in just the tech sector. We’re not Silicon Valley and we shouldn’t try to be. Britain’s heritage lies in product manufacturing – we’re really good at it. After all, the UK is the birthplace of the Industrial Revolution.
In the long-term, Britain’s food and beverage sector could be the lynchpin of a robust economy for a breakaway UK. Broadening our horizons to look at more than just tech start-ups will give our economy the chance to not only survive, but thrive. It's imperative if we want to boost our economy and stave off competition from abroad that we invest in our grassroots companies both inside and outside tech.
As we exit the bloc we need to give credence to our manufacturing sector. Last year alone, 16,000 new food and drinks products launched, which makes investing in FMCG something of a no-brainer. Our expertise as a country sits in the realm of making things. Food, drink, beauty, health, cosmetics and wellness – manufacturing is our heartland and where we face the least outside competition.
It’s not to say that we shouldn’t invest in tech, but rather that we shouldn’t put all our eggs in one basket if we want the post-Brexit economy to flourish over the next decade.
Mark Palethorpe, CFO, Cox Powertrain:
As a small innovative British engineering business, we’re watching the outcomes of Brexit closely. The EU’s Horizon 2020 programme currently provides £2.2bn of funding for universities, research groups and businesses taking on high-tech engineering challenges. That’s a large sum that the UK Government will need to find if the UK’s innovators are going to maintain their efforts. We are encouraged by the UK Government’s stated industrial strategy of getting funding to the small disruptive technology businesses that will be the future growth engine for the UK. We’re keen to see that materialise in terms of funding for SMEs not just for the big corporations with lobby power.
Cox Powertrain is working on a ground breaking new engine and relies on the highest quality talent. Like many British businesses, our team is international, driven by a need for the best quality people available. Post-Brexit, we hope any new visa processes remain straightforward, allowing us to continue to draw on the best possible talent.
On a positive note, the weakening pound will make our engine cheaper to purchase, once available, to overseas customers. Also, a move away from the EU could provide British businesses with a first mover advantage to do mutually beneficial deals with major economies like the US. If the UK Government is positive and proactive, trade deals will be possible and profitable.
Engineers at the forefront are used to change. We’re motivated by it. We hope that Brexit provides as many opportunities as challenges for our business.
Stephen Sumner, Managing Director, Explore Wealth Management:
Brexit is pretty much unchartered territory for everyone and I think it is difficult to predict what the long-term impacts on the UK might be. I think the one thing we can say for sure however, is the likely effect of the uncertainty that Brexit brings to both the markets and clients’ portfolios in the short term.
Each time news hits the markets of either side (i.e. the UK or the EU) making progress with how they stand post Brexit, the relative perception of this news being either positive or negative in nature will cause the markets to react either upward or downward, thus affecting clients’ portfolio values. This will continue to impact clients and their portfolios for as long as any doubt remains as to how the financial aspect of Brexit will affect UK based businesses and the UK and EU financial markets as a whole.
Ultimately though, post-Brexit, the fundamentals of advising clients are unlikely to have changed. As long as investors are suitably diversified in line with their views on risk and overall investment objectives, the effects of Brexit long term we foresee as being no more dramatic than other events in history which have caused short term issues, such as the recent banking crisis.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
The Consumer Prices Index (CPI) recently measured annual inflation at 1.8% in January, which is 1.6% rise since December’s figure. This represents the fourth consecutive that the inflation rate has seen a rise, and the highest in over two and half years, since June 2014.
Alongside this, according to the RAC, fuel prices hit a two year high this month, while on the other hand the prices of clothes and trainers have fallen compared to this time last year. So, what’s happening with the UK’s economy, and why is the country’s inflation rate pumping month on month?
Below we’ve heard comments from a number of economy specialists and market analysts, who have given their say on the latest inflation rise.
Jonathan Watson, Chief Analyst, Currencies:
I believe Inflation is going to continue to present a problem in 2017 as the weaker pound continues to put pressure on raw material and fuel costs for business and consumers. The UK as a net importer relies on buying more from overseas than it sells to the rest of the world. Whilst the recent bout of sterling weakness has made UK goods much cheaper to foreign investors, as the weaker pound and higher inflation gently feeds into the economy the longer term effects are less beneficial.
The pound has fallen some 15-20% against most currencies since the Referendum result in June 2016. With the UK relying on imports of raw materials from overseas the rising price of certain goods is now feeding into a higher Inflation rate for the UK. The reason the effects of this have taken time is because many businesses that buy goods from overseas will have fixed the price many months before the goods were physically purchased. As time goes on and the pound remains weaker against its counterparts the price for companies to buy raw materials from overseas will be lower meaning for them to remain profitable they must raise prices.
The price of Oil is a key factor in all of this since the price of Oil was almost 50% less this time last year. The fact the price of Oil is priced in US dollars doesn't help since the pound has recently been trading at close to 31 year lows against the greenback. A high Oil price affects business and consumers by raising fuel costs. The price of fuel is a large part of many consumers and business fixed costs so increases have a wife effect across the economy.
With Brexit negotiations likely to commence in the coming weeks and there remaining huge uncertainty over what to expect I expect sterling will come under further pressure pushing Inflation higher again. The coming months will also see many businesses importing from overseas needing to renew their contracts fixed last year when the pound was stronger. These new contracts will be more expensive as sterling is weaker leading to a prolonged period of higher inflation as businesses seek to remain profitable.
As we are seeing with the recent trends Inflation rising in inescapable given the economic conditions. Whilst sterling has found some better ground as we have some certainty over the commencing of Brexit I feel there is a long way to go before the pound will be strong enough to make up for the effects on the rate of Inflation, some of which are still to be felt in the coming months. Businesses looking to buy goods from overseas should be planning carefully their future contracts to mitigate for further sterling weakness.
Professor Martin Walker, Professor of Finance and Accounting, Alliance Manchester Business School:
Today’s news about inflation increasing to 1.8% comes as no surprise. Given the very significant fall in the pound following Brexit the costs of imported materials, especially fuel, were bound to rise. Moreover, it is likely that inflation will continue to rise as increased costs continue to feed through to retail prices.
It is difficult to predict just how high inflation will go, but we are potentially looking at a peak value between 3.1 and 3.8 percent, probably around the end of 2017. It is also likely that the peak inflation rate will be substantially greater than pay rises, so real wages will fall a bit on average. This is likely to reduce consumer demand and, as a result, the growth rate in the last half of 2017 and the first half of 2018 is likely to be lower than it would have been in the absence of Brexit. Inflation is likely to start to fall during 2018.
What happens to the UK economy after 2017 is anybody’s guess. It will depend on how well the negotiations on Brexit proceed and also on news about new trade deals after Brexit in 2019. One particular issue that we all need to keep a close eye on, is the potential impact of Brexit on investment by overseas companies in the UK. If this does not decline then it will bode well for the long term. However, if it goes into a sharp decline then Brexit will start to look like a failure.
The only thing we know for certain is that Brexit has increased economic and political uncertainty both for the UK and for Europe as a whole.
Conor Murphy, CEO, Smartr365:
Annual inflation rising to its highest figure since June 2014 was an inevitable consequence of the devaluation in sterling over the past eight months following the Brexit vote.
Generally speaking, there has been a downbeat feeling for some time that inflation will steadily worsen, but I don’t completely agree and prefer to adopt a more positive outlook.
Though the figure released by the Office for National Statistics rose from 1.6% to 1.8%, this is still less than it was expected to be at this stage and I feel that while it is an issue, it is perhaps not as big an issue as it was forecast to be – so the outlook is not entirely gloomy.
That said, should the Pound drop again following the notification of Article 50, then thus would inevitably create further inflationary pressures. Time alone will tell and even financial experts cannot predict the future with certainty.
In my opinion, I feel that the worst/hardest Brexit possible is already priced in and – allowing for temporary fluctuations – I do not think the Pound will weaken further - if anything, I feel it will start to strengthen at some point,
The bottom line is that inflation may well pick up further, but I don’t think it will massively overshoot the 2% target and therefore it is not the end of the world!
In summary, I feel people should expect, and also get used to, slightly increasing prices, but largely offset by salary increases which are still keeping pace – or in many cases exceeding – the rate of inflation.
In a world where people and financial experts tend to err on the side of caution – with good reason – I admit I have a much more optimistic take on the future and prefer to always expect the best rather than the worst.
Charles Fletcher, Head of Analysis, Cogress:
After Brexit, there was an inevitably sharp slump in the value of the pound. This became one of the catalysts for the rise in inflation that we are seeing now. The weakened pound instantly affected imports and consequently, raw materials and goods became more expensive to buy with sterling. The upturn in price pressure forced shops to raise their prices, where consumers saw the cost of everyday products like Marmite increase by up to 10%.
As household incomes feel the pinch of higher living costs, accompanied by an uncertain job market, we are seeing signs of the property market softening. There is a strong connection between (rising) inflation rates and property prices. Some property owners may be excited by the price increase on their home, but when this is accompanied by rising inflation the real increase is negligible. This is because of the growing cost of building materials. If the price to build goes up, less properties will be built, which directly impacts the market’s levels of supply and demand. Not to mention the correlation between interest rates and inflation, whereby if less mortgages are taken out that means less people are getting on the property ladder.
‘Caution’ may still be the operative word to describe the property market for many economists and property researchers, but we are still seeing banks lending, developers building and buyers purchasing homes. Nationwide predicts price growth of 2% for 2017, which is higher than most, despite it being more than half of 4.5% growth last year. The key point is that now, while the top end of the market (£1m+ homes) has taken a hit in both price and transaction levels, the <£1m market has soldiered on admirably amidst rising inflation rates and Brexit. Therefore, the tale of the UK vs. London property market (or even Slough versus Chelsea) will tell two very different stories, especially for how inflation will affect those consumers and their behaviour.
Ranko Berich, Head of Market Analysis, Monex Europe:
Low inflation and strong consumer spending have been two of the dominant features of the UK economy in recent years, driving GDP growth to exceed the Bank of England’s expectations during the post-Brexit vote period. But sterling’s sharp fall in the wake of the EU referendum has set the UK on an inflationary path, while at the same time consumers have dialled back spending sharply.
We’ve yet to see the bulk of the inflation expected in 2017 due to past depreciation in sterling. For example, inflation in food items is only just beginning to pick up due to cutthroat competition in the supermarket sector. Recent survey data also points towards surging input costs for manufacturers. So, despite January’s year on year CPI inflation being the highest since 2014, we’re likely to see even higher figures in the near future.
How the consumer reacts is crucial. The fall in consumer spending in the three months to January was the first since 2013, but it’s a volatile data series and the move could simply be a small pullback after a long, steady upwards trend. However, the timing coincides with an increase in average store prices, suggesting that as prices continue to rise consumers will keep dialling back, potentially resulting in a significant GDP slowdown in 2017.
The UK economy has indeed exceeded almost all expectations for the post-referendum period, resulting in criticism of the Bank of England’s alarming forecasts. But with inflation beginning to bite and a big question mark hanging over the direction of consumer spending, the UK economy could lose the underwrite it has long enjoyed from a strong consumer. The BoE’s initially dire predictions could ultimately be proved correct.
Owain Walters, CEO, Frontierpay:
The data shows a mixed picture, with consumer inflation coming in slightly below market expectations (1.8% vs. 1.9% expected), while manufacturing prices show a slightly higher inflation than expected. This would indicate to us that a further rise in inflation is due, as the rising costs of goods are still to fully filter through to the consumer. However, whilst it is currently popular to panic about the economic data in the wake of the Brexit vote, we would point out that inflation is still below the Bank of England’s 2% target and the current rise in inflation is a one-off event due to the devaluation of Sterling. The markets expectations have been dashed this morning and as a result the Pound has lost about 1 cent to the US Dollar and about 0.8 cents to the Euro.
We would also love to hear more of Your Thoughts on this, so feel free to comment below and tell us what you think!
