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!”
The global economy is firing on all cylinders
One of the most important features of the outlook for next year is that the global economy is now firing on all cylinders. Both the US & China have been steady performers for some time and we have more recently seen signs of moderate economic growth in both Japan and the Eurozone. According to the latest International Monetary Fund (IMF) forecast, global Gross Domestic Product (GDP) growth is expected to accelerate from 3.2% in 2016 to 3.6% in 2017 and 3.7% in 2018, the highest since 2011. This signals that the global economy is at last returning to normality and this will be an important backdrop for policymakers.
The monetary policy tide
As a result, we should now expect to see central banks retreat from the super loose policies which have been in place since the global financial crisis. Different central banks will emphasise different aspects depending on their economies, but the direction of policy is the same. Tightening will take two forms; increases in interest rates and the run-down of quantitative easing (QE). These changes will negatively affect asset prices in two ways; withdrawal of QE will eventually bring an end to the excess liquidity which has chased all kinds of assets, while rising interest rates will put pressure on the valuation of said assets. In our opinion, loose money policies have gone on for far too long and have created asset price bubbles which will take a generation to resolve, particularly in the price of residential housing. Gradually letting the bubble down is going to be tricky.
The UK has been resilient
Turning back to the UK and our belief that it’s not all doom and gloom. Economic data has been resilient in many areas, with the composite Purchasing Managers’ Index (PMI) averaging 54.6 so far this year, versus 53.4 in 2016. Manufacturing production is up 2.7%, the unemployment rate is at the lowest since the 1970’s and the government continues to see strong tax receipts. On the negative side, the main feature has been car sales, with October new car registrations down 12.2% versus October 2016 and down 4.6% in the year-to-date. Car sales are a sign of consumer confidence, so this is an area of concern. However, it is worth noting that car tax on many new vehicles has skyrocketed and this will have deterred buyers.
Following the recent Budget Statement, much of the commentary centred on the slower growth rate forecast for the UK. However the forecasts are prepared by the independent Office for Budget Responsibility (OBR) and the lower growth forecasts add a measure of credibility to the government borrowing figures, which still place the UK budget deficit on a declining trend.
Inflation & interest rates
Commenting briefly on inflation and interest rates, the October headline Consumer Price Index (CPI) rate was 3.0%. The global backdrop has picked up, and people are no longer talking about deflation, but global inflation is not running away and the UK CPI is expected to ease back a little and finish this year just below 3% and next year at about 2.5%. We saw the Monetary Policy Committee (MPC) raise interest rates by 0.25% in their November meeting, but we are doubtful that this is the start of a series of rate rises. The UK faces a lot of uncertainty over Brexit and the MPC will not want to embark on a series of rate rises and risk being blamed if the economy slows down. In this they will be supported by the actions of the European Central Bank (ECB), who also show no sign of wanting to raise interest rates and who will focus on tapering their QE programme.
Putting the various pieces of data together, the conclusion is that it is not all doom and gloom. The UK economy has not collapsed and it is not booming, suggesting that UK growth next year will be somewhere in the range of 1 – 2%. Although the outlook for the UK next year is clearly uncertain, we would opt for the higher end of this range given the accelerating global backdrop.
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