Economic Update: 12 May 2017

BANK OF ENGLAND BASE RATE DECISION

On Thursday, the Bank of England’s (BoE) Monetary Policy Committee (MPC) voted 7-1 to keep UK interest rates on hold at 0.25%. This offers continued support to the economy and the jobs market. They also indicated that raising interest rates would not be an effective way of tackling the increase in living costs. This is further devastating news for savers invested in deposit accounts earning next to zero.

Consumer price inflation (CPI), currently at 2.3%, has risen above the MPC’s 2% target. This follows on from the UK’s vote to leave the European Union, but the reasons for rising prices are many and varied. We know that if inflation goes up and wages do not appreciate to the same extent, real wages fall and this in turn erodes spending power. Of late, wages have been lagging, but a smooth exit from the EU and continued positive developments in the labour market will help deliver corporate profits growth and increase revenue for the Government. This is what will ultimately feed wage growth in both the private and the public sectors of the economy.

As usual, the report generated negative news headlines with the focus on UK GDP growth slowing in Q1 2017 to 0.3%. This produced the accompanying headline that the Bank was forced to trim its UK economic growth forecast for this year from 2% to 1.9%. However, what was given less prominence was the good news that their longer-term predictions for 2018 and 2019 were increased. Growth projections were nudged up by 0.1% to 1.7% and 1.8%, respectively.

Click here to view the full Inflation Report.

The BoE’s Monetary Policy Summary states, ‘The outlook for global activity continues to improve’. In fact, the MPC forecast that weaker consumption growth this year is likely to be balanced by increased trade and investment, with business investment likely to be higher in 2017 than previously projected. Furthermore, the stronger global outlook and the weakness in sterling provide incentives for many exporters to renew and increase capacity.

In summary, measures of consumer confidence remain steady. The MPC expects growth to continue at a ‘moderate pace’ of between 0.3% and 0.4% per quarter for the rest of the year. By the end of the decade, the unemployment rate is projected to drop to its lowest level since 1975, and a brighter global outlook is likely to support growth in the coming years.

Click here to view the Monetary Policy Summary.

 

UK CPI Inflation and the BoE Base Rate

Source: Bloomberg, 2017

 

VICTORY FOR MACRON

On Sunday, it was revealed that Emmanuel Macron will become the next French president, winning 66.1% of votes, beating his far-right opponent Marine Le Pen. Macron’s inauguration will take place on Sunday 14th May.

On Macron’s first full day in office he is expected to name his choice for Prime Minister, who will in turn appoint government ministers. Usually the Prime Minister is drawn from the National Assembly but Macron is likely to go against tradition because he started his own ‘En Marche!’ movement a little over 13 months ago.

 

Who is Emmanuel Macron? • Former investment banker.

• Served for two years under outgoing President François Hollande as Minister of Economy, Industry, and Digital Data, but has never before held an elected office.
• Aged 39, will be the youngest president in the 59-year history of France’s Fifth Republic.
• Pro-business, pro-EU, centrist. His key policies include; • Economy – advocates a Nordic-style economic model that mixes spending cuts of €60bn over five years with a €50bn stimulus package over the same period. He also plans to cut corporate tax from 33% to the European average of 25%
• Defence and Security – pledges to increase defence spending to 2% of the country’s GDP by 2025, hire 10,000 extra police officers and create 15,000 additional prison places.
• Immigration – in stark contrast to Le Pen, Macron does not envisage a France that shuts out immigrants and asylum seekers. Last Friday (5th May), two days before the election, the CAC 40 (France’s stock market index) hit a new nine-year high of 5432 points, up 11.7% year-to-date.

 

SOUTH KOREAN ELECTION AND EVENTS IN THE REGION

Democratic candidate Moon Jae-in won the Presidential elections in South Korea. Moon, who was sworn into office on Wednesday after his decisive victory in a snap election, faces the task of navigating the country out of rising tensions over North Korea’s nuclear program and the risk of a rift with the United States.

Moon is perceived as being an anti-corruption leader and a champion of democracy. The stock market in South Korea went up after he won the presidency. In the background their recalcitrant neighbour, North Korea, said it intends to proceed with its nuclear tests. However, this was shrugged off as yet more posturing with the best gauge being other markets in Asia trading higher. Meantime, the US is keeping up the pressure on North Korea, with Trump showing himself as equally unpredictable as the leader of North Korea. Trump has said he is willing to meet Kim Jong-il, while simultaneously sending an armada to the area.

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