2017 was always going to be a year of important elections, with elections in the Netherlands, France, Italy and Germany. What no one envisaged was that there would be an election in the UK. Following the issuing of Article 50, Theresa May has surprised markets by announcing her intention to have a General Election on 8 June 2017. The initial impact was that the UK equity market fell, with the FTSE 100 falling 2.46% on the day of the announcement, however, Sterling rose sharply. It rose 2.2% against the US Dollar to $1.2846. A General Election could create uncertainty for both UK equity and currency markets.
The rise in Sterling has taken it to its highest point for 10 weeks, although the Pound remains well below levels seen before the UK’s Brexit vote last June.
Analysts at Deutsche Bank said the news of the forthcoming UK election meant it would not be so downbeat about the outlook for the UK and its currency. Deutsche Bank also commentated that, “It makes the deadline to deliver a ‘clean’ Brexit without a lengthy transitional arrangement after 2019 far less pressing given that no general election will be due the year after”.
Prior to the announcement of the UK General Election, the International Monetary Fund (IMF) published that they are forecasting that the UK economy will grow 2% this year, which is stronger than all the other major developed economies, with the exception of the US.
The IMF forecast for the UK this year is now only marginally below what the IMF predicted a year ago (2.2%), its last full forecast before the Brexit referendum. The revised forecast reinforces the picture of the UK economy’s performance being little affected by the aftermath of the referendum, contrary to the expectations of the IMF and many independent economists. However, the IMF does expect the longer-term impact on Britain to be adverse.
Inflation, as measured by the Consumer Prices Index (CPI), over a 12-month period, was unchanged in March 2017 at 2.3%.
The IMF believes the world economy is gaining momentum and, “could be at a turning point”. The IMF forecast that global growth in 2017 will be 3.5%, up from the 3.1% that was forecast in 2016. The IMF sees buoyant financial markets and, “a long awaited cyclical recovery in manufacturing and trade”. The rally in the prices of commodities has also helped dispel fears of deflation, which has been seen as a danger, especially in the developed world. Deflation, in some circumstances, can aggravate economic weakness.
The IMF warns of headwinds that could weaken its global projections. The organisation highlights the possibility of protectionism and what the report calls ”trade warfare”.
A trade war was one of the fears of a Donald Trump Presidency. Although it is still early days, the fears of a trade war are fading, with the White House appearing to soften its stance towards the North American Free Trade Agreement (NAFTA) and China. Emerging assets that fell in value as part of the ‘Trump trade’ have recovered. The Mexican Peso has returned to levels last seen before the US Presidential Election.
The US Department of the Treasury, on its first foreign exchange policy review under the Donald Trump administration, has not named China as a currency manipulator. Donald Trump’s meeting with the Chinese President, Xi Jinping also appears constructive, buying both sides time to address the bilateral trade imbalances. China has proactively offered some trade concessions.
In March 2017, US non-farm payrolls rose by only 98,000, with the market expecting a rise of 180,000. However, the US unemployment rate fell to a 10-year low of 4.5%. A more encompassing measure of unemployment that includes discouraged workers, those at work part-time for economic reasons, declined 0.3% to 8.9%, the lowest level since December 2007.
Although the payroll numbers were disappointing, weather issues may have contributed to March’s numbers, as a big snowstorm in mid-March may have depressed activity. Retail jobs fell by 30,000 and construction was up just 6,000 after a gain of 59,000 in February. Wage growth rose with average hourly earnings up 2.7% on an annualised basis.
European Politics and Economy
The next election that could have a dramatic impact on Europe is the French Presidential Election, that is due to be held on 23 April 2017. Should no candidate win a majority, a run-off election between the top two candidates will be held on 7 May 2017. Given the large number of undecided voters in this year’s race, any one of a number of candidates could make it through to the second round, however, Emmanuel Macron and Marine Le Pen are the two front runners. If either of the 2 ‘Eurosceptic’ candidates, Marine Le Pen or Jean-Luc Melenchon, do well in the first round of the election, there could be increased uncertainty within the Eurozone.
Although there are political concerns within Europe, European businesses are growing at their fastest rate in nearly 6 years, led higher by France and Germany. An improving economy may encourage the European Central Bank (ECB) to move towards raising interest rates and further easing of its monthly bond-buying programme. However, Eurozone inflation in March, as measured by CPI, remains subdued, rising 1.5% over a 12-month period, having fallen from a four-year high of 2%, recorded in February. The ECB may want to wait for inflation to pick up further, as well as seeing the outcome of the French Presidential Election, before making a decision to raise interest rates.
The Bank of Japan’s Tankan Survey reveals that business conditions of Japanese companies improved during the first quarter of 2017. The improvements seem larger for manufacturers than for non-manufacturers. Large manufacturers saw their business conditions improve for 2 consecutive quarters, whilst the business conditions of small manufacturers have improved for 3 consecutive quarters. Manufacturers are benefiting from the weak Yen and a steady expansion in their export volumes. The Tankan Survey confirms the recent global economic trends.
The developing economies are benefiting from global reflation and solid domestic demand. Donald Trump’s recent comments that the US Dollar is ”too strong” and preference for a lower interest rate policy, are supportive of the emerging economies and markets.
Official figures have revealed that China’s economy grew 6.9% in the first quarter of 2017. This is slightly higher than expected, being driven by state-led infrastructure spending and demands for new property, despite China’s pledge to become less reliant on these areas. Last month, China cut its growth target for this year to 6.5% from last year’s target of 6.5-7%. Debt remains a particular concern, with Chinese total and private debt now worth more than 250% of GDP and looks set to grow.
Since the 2008 financial crisis, the global economy has struggled, with exceptionally low economic growth and extremely low inflation, with some countries actually experiencing deflation. The economic trends within the global economy appear to have changed. Economic growth, together with inflation is strengthening. If inflation continues to strengthen, central banks, led by the US Federal Reserve, will ‘normalise’ interest rates from the extremely low levels. Admittedly, it is still early days; but the improving global economy could have a dramatic impact on the equity and fixed interest markets. There are a number of risks to the new economic scenario. These include an increase in economic protectionism, potentially resulting in a trade war, political uncertainty (particularly in Europe) and potential conflicts in Syria and North Korea.