Summer summary | Deloitte UK has been saved
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With the return to work underway here’s our summary of the key developments in the global economy and in politics over the summer.
On the economic front the mood has been fairly positive, with activity nudging higher led by the euro area, Japan and emerging markets. Unemployment has fallen in Europe, North America and Japan since June. The VIX index, a gauge of financial market uncertainty, is close to a 25 year low. In the last three months global equity prices have risen by 5% and the euro by 4%. The dollar and the pound have continued to soften. Copper and oil prices rose over the summer, the later buoyed by Hurricane Harvey.
The turnaround in the economies of the euro area continued over the summer. German business confidence is running at the highest level since German reunification in 1990. Growth forecasts for the region have shot up in the last year, and the recovery has spread from strong performers, particularly Germany and Spain, to countries which have, until recently, have lagged well behind, including France, Italy, Portugal and Greece. It is a sign of how times have changed that the Greek government was able to raise money from the bond markets in July for the first time in three years. Market expectations of a ‘Grexit’ have dropped to an all-time low.
Japan, the world’s third largest economy, showed unexpected signs of strength over the summer. Business confidence is at a 25 year high and the economy has just posted its longest unbroken period of growth in more than a decade. The stronger picture suggests that Prime Minister Shinzo Abe’s economic stimulus programme, so-called Abenomics’, may, finally, be kicking in.
US growth has been ok, but not exciting. The fact that the US is expected to growth by around 2.0% this year, the same rate as the usually more sluggish euro area, says it all. Particular areas of strength for the US are job creation and manufacturing output. The Federal Reserve felt sufficiently confident about the recovery to raise interest rates in June. Market watchers see the Fed raising rates again in December and think there is a good chance that the Fed will start to unwind Quantitative Easing before the end of the year.
UK activity softened over the summer as consumer spending slowed in the face of higher inflation. Second quarter growth came in at 0.3%, making the UK the slowest growing economy in the Group of Seven major industrialised nations. July’s CFO Survey reported that UK CFOs see Brexit as the biggest risk facing their businesses and are responding by cutting costs. But a stronger global economy and a weak pound are a boon for exporters. The CBI reported that export orders for manufacturers are close to a 20-year high.
Global inflation pressures eased over the summer. The effect of last year’s sharp rises in commodity prices are starting to fade and lower unemployment has not, so far, done much to push up wages. Economists have trimmed their forecasts for inflation in the US and the euro area in recent months. The UK is an outlier - the Brexit-induced fall in the pound has given the UK one of the highest inflation rates in the industrial world and the inflation rate is likely to remain relatively high, and above 2.0%, into 2018.
On the political front the risks of a shutdown of the US government have risen. President Trump threatened to close the government if the Congress did not finance the President’s proposed border wall with Mexico. Concerns over US protectionism were stoked by Mr Trump’s threats to withdraw from the North American Free Trade Agreement. A number of senior aides left the White House over the summer, including chief strategist, Steve Bannon, and Anthony Scaramucci, who stepped down as communications director after 11 days. North Korea’s missile and nuclear tests have substantially raised tensions in the region.
In Europe worries about a breakthrough by Eurosceptic parties have eased. In France Emmanuel Macron won a convincing victory over the Marine Le Pen’s Front Nationale in May. Mr Macron’s popularity ratings have since dropped sharply, with a sizeable majority of French voters now dissatisfied with him, a worse performance than his last two predecessors at this stage of presidency.
The risks of an upheaval remain in German’s election on 24th September look low with Angela Merkel’s CDU/CSU coalition maintaining a strong lead in the polls. The latest betting odds imply a 92% probability of Mrs Merkel being re-elected as Chancellor of Germany.
The UK government has published seven Brexit position papers, including ones on Northern Ireland, citizens’ rights and the jurisdiction of the European Court of Justice, over the summer. The UK government sees a need for a transition period after 2019 for Britain to finalise an exit agreement with the EU. Over that period the government appears to want to maintain something akin to membership of the European customs union. In late August the Labour Party shifted its stance by backing membership of the single market at least for four years after the UK formally leaves the EU in 2019.
Labour have enjoyed a surge in support since the June elections and are evenly tied with the Conservatives with 42% of the vote in the latest opinion polls. Labour leader Jeremy Corbyn’s satisfaction rating has risen from 31% in the month before the elections to 44% now. Mrs May’s ratings are down from 43% to 34%, her lowest since becoming Prime Minister.
The overall balance of economic news over the last three months has been positive. The obvious uncertainties are posed by North Korea, US politics, debt levels in China and Brexit. Equities have had a great run, but we’re seeing more nervousness about the risk of a correction. Purchases of derivative contracts intended to protect investors from a fall in equity prices have risen and the so-called SKEW index, a measure of investor concern about tail risk, rose close to the highest level on record in mid-August. The global economy has strengthened a bit over the summer, but the prudent response is caution not euphoria.
PS - The apparent collapse in levels of savings in the UK has stoked worries about the condition of household finances. Last week the UK’s Office of National Statistics revised up previous, historic savings ratio figures in response to shifts in the structure of the economy, particularly higher levels of self-employment which have raised income from dividends. The UK’s so-called ‘savings crisis’ may not be quite as acute as feared.
Ian Stewart is a Partner and Chief Economist at Deloitte where he advises Boards and companies on macroeconomics. Ian devised the Deloitte Survey of Chief Financial Officers and writes a popular weekly economics blog, the Monday Briefing. His previous roles include Chief Economist for Europe at Merrill Lynch, Head of Economics in the Conservative Research Department and Special Adviser to the Secretary of State for Work and Pensions. Ian was educated at the London School of Economics.