June 2017 is going to be remembered for two elections. The first is obviously the UK General Election, but the second is across the Channel with the French parliamentary elections, which took place on 11 and 18 June.
Starting with the UK General Election, Theresa May lost her parliamentary majority, which has weakened her political standing and increased the uncertainty regarding Brexit and the future direction of the government. It is probably too soon to know which direction the government will take, but it is looking likely that fiscal spending will increase, i.e. austerity will end or be reduced. The Brexit negotiations may also lead to a ‘softer’ Brexit. Similar to the EU referendum result, the currency has taken most of the strain and has fallen sharply, which should increase the spike in inflation.
UK inflation, as measured by the Consumer Prices Index, rose to 2.9% in May from 2.7% in April. This is the highest inflation figure since June 2013 and is above the Bank of England’s 2% inflation target. The increase in inflation is primarily due to the weakness in Sterling, which has increased the cost of imports.
After a number of years in which the UK economy outperformed many developed economies, particularly in Europe, the UK is starting to underperform, as there are signs that the UK economy is slowing down. The economy only grew 0.2% in the first quarter of 2017, which is below the preliminary estimate of 0.3%. This downward revision is due to broad based revisions within the services sector.
One of the problems with the UK economy is that wages have not kept up with the rise in prices. The most recent data on wages showed that earnings, excluding bonuses, increased 1.7% in the 3 months to April 2017.
The National Institute of Economic and Social Resources expect inflation to rise further over the course of the year, reaching its peak in the final quarter of 2017. The spike in inflation should exert downward pressure on real household disposable income, at a time when wage growth remains modest, in turn, squeezing the consumer.
The Business Chamber of Commerce has warned that businesses are being hit by the rise in inflation. Inflation squeezes margins and weakens the ability to invest, particularly during a period of political uncertainty. Business confidence has also taken a hit.
Given the political uncertainty and the uncertainty over Brexit, it is unlikely that the Bank of England will feel the necessity to raise interest rates this year. Despite concerns of a slowdown in the UK’s domestic economy, house prices rose in April 2017, by 5.6%, compared with April 2016. It must be pointed out that most of the sales in April came before Theresa May announced the snap General Election and so will not reflect the political uncertainty arising from the election result.
It is not all doom and gloom in that although consumer spending is being squeezed, the unemployment rate, at 4.6% in the three months to April 2017, is at its lowest rate since 1975. UK companies that export goods are also benefiting from the weaker currency, although the increased uncertainty may reduce investment.
Now turning our attention to the second election, in which there were no surprises. En Marche!, the political party that was only founded on 6 April 2016 by the new French President, Emmanuel Macron, won a big majority in the French parliament. This should reduce the geopolitical risk within Europe and enable Emmanuel Macron to implement his reform agenda.
Emmanuel Macron’s reform agenda should benefit from an improving economy. Employment rose by 89,700 in the first quarter of 2017, the fastest rise in a decade. The increase was driven by the private sector. Employment has risen sharply in the past year, jumping by 284,100, compared with the first quarter of 2016. This is the biggest increase since 2011. Although this is positive, unemployment remains high at almost 10%. Emmanuel Macron has promised labour market reforms, making it easier to hire and fire, which should reduce unemployment.
The European Union has seen the number of people in work rise 1.4%, in the first quarter of 2017. Despite strong employment figures, there has been a slight slowdown in industrial production, which rose 1.4% in both the Eurozone and European Union, compared with a 2.1% increase in March. This is positive for the economic growth figures for the second quarter, after a 0.6% rise in the first quarter of 2017.
In the first quarter of 2017, US GDP growth slowed, but the Federal Reserve (Fed) believes that this is transitory and they expect a rebound in the second quarter. Whilst there are signs that the recovery in the world’s largest economy is gaining traction, the Fed are still waiting for evidence that recent declines in the unemployment rate are starting to push up wages. US unemployment has fallen to a 16-year low of 4.3% in May, whilst average hourly earnings grew by only 2.5%, which was slightly below expectations of 2.6%.
In response to the positive outlook for the US economy, the Fed has raised interest rates by 0.25% and reiterated their intention to raise rates one more time this year. The Fed has also announced that they are planning to reduce their $4.5 trillion bond portfolio that they bought during the years of Quantitative Easing, although there was no mention on the timing.
Politics is also affecting the US in that Donald Trump’s administration is being investigated for its links to the Russian government. It is also not clear when Donald Trump will start to implement his economic reforms and proposed increase in infrastructure spending.
The high drama in Europe has meant that the focus has been away from Japan, but the economy is making progress. Economic growth is projected to edge up to 1.4% in 2017, aided by stronger international trade in Asia and fiscal stimulus. High corporate profits should support business investment in 2018, which should keep growth close to 1%. Headline inflation is expected to reach 1% by the end of 2017, due to ongoing monetary easing.
The International Monetary Fund (IMF) has raised its forecast for China’s 2017 economic growth to 6.7%, due to the government’s support in expanding credit and public investment. The forecast has been raised from April’s forecast of 6.6%. China’s economy grew 6.9% in the first quarter of 2017, which was ahead of expectations and above the Chinese government’s target of 6.5% for the full year. The IMF said that it now expects China’s growth to average 6.4% between 2018 and 2020.
Qatar has been in the news in that a number of Gulf and Middle East states, led by Saudi Arabia, have cut diplomatic ties with Qatar, closed the land border and expelled Qatari citizens from their territories. Although the impact on the global economy is expected to be limited, the dispute highlights there are many potential flashpoints on the geopolitical risk map, all of which affect global and regional markets.
The global economy is continuing to make progress, with the exception of the UK. The engine of the global economy, the US is continuing the process to normalise interest rates, which is a good indicator of confidence in the US, as well as the global economy. The UK General Election has created more uncertainty and there is also a squeeze on the consumer. The UK economy is now experiencing slower economic growth than most developed economies. The result of the French election should benefit Emmanuel Macron’s reform agenda, which should benefit both the French and Eurozone economies.