Despite market volatility, the synchronised global economic recovery has continued apace. In the UK, GDP forecasts were revised up to 1.6% on the back of this stronger growth, whilst we also saw wage growth exceed inflation for the first time in twelve months. However, this dip in inflation (to 2.5%) has caused the market to speculate that UK interest rates – and therefore bond yields – will not now rise as fast as previously thought.
Although the economic outlook for the UK in 2018 is mixed, we believe the consensus is too pessimistic on growth. The global economy is now firing on all cylinders – which will benefit the international-facing UK market – and we believe the risks to growth, inflation and interest rates are all to the upside, in the UK as well as globally.
In this forecast we look forward to 2018, with a perhaps somewhat brighter outlook for the domestic UK economy than the market consensus. Much of the commentary surrounding the UK is very negative, but looking at the data itself brings to mind the line from Russell Howard’s TV show: “It’s not all doom and gloom!”
Many of the recent comments around fixed income have referred to the impact on the asset class of global monetary tightening. For example, the US Federal Reserve (Fed) and Bank of Canada (BoC) have already raised interest rates, the Bank of England (BoE) have followed suit and, in January, the European Central Bank (ECB) will begin tapering their huge quantitative easing programme.