Happy New Year! I hope you had a great break over Christmas and New Year. So what lies ahead in 2018? Conventional thinking is that uncertainty over Brexit will impact on business confidence and investment. Household incomes will be squeezed by high inflation and low pay growth. Government spending will be hampered by targets set for the public sector deficit. Low growth will persist into 2018 as inflation lingers above target through the year.
According to the Treasury summary of forecasts for the UK economy, growth estimates this year range from 0.3% to 2.6%. Forecasts for investment range from -1.0% to 3.1%. Household spending forecasts range from zero to almost 2%. Confused? Well that's hardly surprising. The Office for Budget Responsibility were hung up on UK productivity or lack of it. The Central forecasts from the OBR in November, suggest growth will be around 1.4%. Why so gloomy?
Just before the Christmas break, the ONS released the latest update on growth in the economy for the first nine months of the year. The good news, growth was revised up to 1.9% in 2016. GDP(Output) averaged 1.9% over the first nine months of 2017. Manufacturing up 3.3% and construction up 4.8% featured well in the Q3 data. Investment was resilient over the first nine months of the year despite the "locker talk" about an investment strike. The bad news, service sector growth almost halved from the heady levels of 2016 to just 1.4% in the data from July to September. Consumer spending slumped to just 1% growth from over 3% last year. The SMMT are worried about the impact on car sales in 2017 and 2018, this plus the lack of an industrial strategy for the motor industry and support for diesel specifically.
For those who worry about productivity (and I recommend you don't), the latest ONS data released this week suggests productivity grew by almost 1% in the third quarter of the year. Growth at last? Perhaps but comparable levels of performance have not been so low since the 1820s. Features were productivity growth in healthcare and the criminal justice system. Who would have thought ... . So why the rally? Steady growth with low job growth the explanation. Productivity is not a driver of growth but a simple fraction solution from and output nominator and labour denominator. Why do economists worry so much about productivity? Well, it stops them worrying about capacity and the output gap ... Bless ...
Economics prospects in 2018 ...
Overall we expect growth of around 1.8% in 2017 and 1.7% in 2018. Manufacturing output growth will halve from over 3% in 2017 to just 1.5% in the year ahead. Construction output growth will slow from over 5% in 2017 to 2.9%. Service sector output will rally in the year to around 2%.
The full forecast set will be released next week. The quarterly economics presentation will take place in the second week in February. Inflation will end the year around 2.5%. Earnings will increase to between 2.5% and 3% by the final quarter of the year.
Exports will benefit not so much for currency falls but relative rates of growth in Europe, North America and the rest of the world. With the exception of Venezuela, world growth is expected to be just over 3.5% this year. Growth in Eastern Europe was around 4% in 2017. No wonder the EU immigration stats are falling.
World trade growth is expected to be almost 4% boosted by an upswing in defence spending. Will this benefit the balance of payments deficit? To some extent yes but exports have a high degree of import dependency. The latest data in the national accounts for Q3 flatter to deceive.
Government borrowing is set to fall in the 2017/18 financial year to just over £40 billion around 2% of GDP. A further fall to around £35 billion is on the cards for 2018/19.
In the US growth is expected to be over 2.5% this year boosted by the Trump tax cuts. The boost to consumer spending will be relatively muted. The impact on corporate earnings and dividends will be substantial. No wonder US markets are bouncing. As much as $400 billion could be repatriated into the homeland as a result of the change in tax regime.
So what of rates. The Fed is expected to raise rates three or four times this year. The Bank of England is expected to follow at least twice in 2018 assisting the process of returning inflation to target. Base rates will rise to 1% by the end of the year. They should be higher but given doubts over Brexit and growth, the MPC may be reluctant to make the call.
We remain relatively confident about the year ahead despite the confusion over Brexit. the Chancellor is suggesting the UK could leave the EU customs union but enter into a new customs union with the EU. Another Schrödinger's feline solution, in and out at the same time!
Liam Fox is suggesting we join the TPP, the Trans Pacific Partnership. You don't have to have a shore line on the Pacific Ocean but it will almost certainly help. So much for defying the laws of a gravity trade model. No one in government appears to realise growth in foreign parts will lead to investment in local manufacturing facilities in North America, China and S E Asia. The Secretary of State for International Trade and President of the Board of Trade has traveled 200,000 miles over the past year at a cost of over £100,000. Doing what, we can't be sure. Perhaps he should play more golf, until we have the EU deal in the bag ...
© 2018 John Ashcroft, Economics, Strategy and Social Media, experience worth sharing.
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The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.