Over the next few months, the big issue facing the US economy and given its size, the global economy, is Donald Trump and whether he can implement his proposed economic and tax reform policies. Donald Trump has a very low rating in the US polls, and with the mid-term elections on the horizon, the Republicans are likely to reach some agreement on the economic and tax reform policies.
The Trump administration has already made one political decision. By appointing Jerome Powell to replace Janet Yellen, as the Federal Reserve (Fed) Chair, the administration has started to put its mark on the Fed, but there is unlikely to be any fundamental change to the US economic policy. Why would you rock the boat?
Despite the uncertainty of whether Donald Trump’s economic and tax reform policies will be implemented, the US economy is continuing to make progress, with better than expected third quarter GDP annualised growth of 3%.
Consumer spending has also bounced back strongly in the wake of Hurricanes Harvey and Irma. The Conference Board Consumer Confidence Index has surpassed the peak it achieved at the start of 2017, hitting 125.9, the highest level since December 2000.
US Non-Farm Payrolls rose by 261,000, in October, but this was slightly below forecasts. US unemployment is 4.1%.
In October, US Industrial Production was up 0.9% on the month, signalling strong momentum into the final quarter. Given the strength of the US economy, it is all but guaranteed that the Fed will increase interest rates by 0.25% in December.
In the Budget, the Chancellor of the Exchequer, Philip Hammond, announced that GDP Growth will be 1.5% in 2017. It was also announced that the Office for Budget Responsibility have downgraded productivity and GDP growth. GDP growth is forecast to grow by 1.4% in 2018 and 1.3% in 2019.
The other big economic event in the UK has been the Bank of England (BoE) increasing the base rate by 0.25% to 0.5%. Since this decision, it was announced that inflation, as measured by the Consumer Prices Index (CPI), in October, rose 3% on an annual basis. This was below expectations of 3.1% and crucially below the trigger point for the BoE to write a letter to the Chancellor of the Exchequer. The impact from the weakness of Sterling is fading. Data from producers show that both input and output prices peaked months ago, which should mean that the UK is close to a peak in CPI.
The BoE has made comments that they are unlikely to raise interest rates in the short term, due to the uncertainty arising from the Brexit negotiations and a slight lowering of long-term inflation forecasts. The latest inflation figures are helpful for the BoE, especially if inflation now falls back to the BoE’s 2% inflation target.
Consumers within the UK economy are continuing to struggle with the headwind created by Sterling’s devaluation. This can be illustrated with the latest BRC Retail Sales in October, down 1%, and RICS House Prices in November, up 1%, both of which were below expectations.
On the positive side, the UK’s Industrial Production in September, was up 2.5%, with the Trade Balance at a £2.75 billion deficit, both of which benefited from the weak currency.
Unemployment in the UK remains low, and in September, was 4.3%, but wages have still failed to accelerate, with wages growth stalling at 2.2%.
The positive trend within the Eurozone’s economy remains intact. GDP grew 2.5%, year on year, in the third quarter, which is the fastest pace of growth since the first quarter of 2011. This was the last time the European Central Bank (ECB) increased interest rates, which is now considered a policy error and dubbed the “Trichet moment”, named after the ECB’s President at the time.
Other economic data remains positive. The unemployment rate has declined to 8.9% in September, which is the lowest level since January 2009.
Inflation, as measured by CPI, in the Eurozone, slowed to 1.1% in October, from 1.3% in September, with the ECB expecting that it will take some time before domestic inflation pressures rise to the point that it is consistent with the ECB’s 2% inflation target.
Mario Draghi, the ECB President, has given a positive assessment for the outlook of the Eurozone economy, when he announced that Quantitative Easing would be extended to September 2018, but the pace of bond purchases would be reduced from 60 billion Euros to 30 billion Euros.
Political uncertainty remains in the background, although at this moment in time, political factors are not driving markets. Spain is planning to hold fresh regional elections in Catalonia on 21 December, whilst the Italian government has made an amendment to the Italian constitution, which has effectively reduced the populist Five Star Movement’s chances of forming a government.
The other big political event is the lack of a German government, with Chancellor, Angela Merkel, unable to form a coalition, but like the other political events, this has had little impact on the markets.
Similar to Europe, the economic data has been positive. In the third quarter, real GDP growth was 1.4%, quarter on quarter, annualised. This is above the trend growth, which is thought to be around 1% and the first positive seven quarter run for real GDP growth in 16 years, although it was slightly weaker, quarter on quarter, than expected. Growth was driven by a pick-up in external demand, which offset a slowdown in domestic demand.
Net exports contributed 2 percentage points to growth, an upswing from a negative contribution to growth in the second quarter. Inventory investment also contributed strongly to growth as firms built up their stock.
Although exports were positive, private consumption fell 1.8%, quarter on quarter annualised, and was a drag on GDP growth. This is likely to be temporary as total income continues to pick up and household sentiment remains high.
Core inflation, as measured by CPI, remains at 0.7%, but other data points to a pick-up in inflation in the coming months. Labour market data suggests that Japan is operating close to full employment, which bodes well not only for wage growth, but also capital spending for corporates.
The recent big political event in Japan was the General Election, which resulted in strengthening Shinzo Abe’s position as Prime Minister. His victory should reinforce the current Japanese monetary and fiscal policies.
Similar to most of the other political events, China’s 19th Communist Party Congress has had relatively limited impact on markets, which is because there were very few surprises.
Following the Communist Party Congress, China has announced for October, Retail Sale up 10%, Fixed Asset Investment up 7.3% and Industrial Production up 6.2%. Although these growth rates appear strong, they are in fact a deceleration, but this is no cause for alarm, because the Chinese government is trying to control the pace of growth.
The global economic recovery and the increased expectations that OPEC led production cuts will be extended, has led to an increase in the oil price. The oil price is unlikely to rise significantly due to the increasing use of shale gas.
Two themes remain prevalent for the global economy and markets. The first is an improving global economy, with even the Eurozone and Japanese economies strengthening. The US and the UK have also started the process of normalising interest rates, although it is expected that interest rates will remain low for the foreseeable future. The second is political change and uncertainty, but so far, none of these risks has had a negative impact on the global economy or markets. However, the big issue facing the global economy and markets is Donald Trump and whether he can implement his economic and tax reform policies.