Strategy & economics
Economic global warming
Our investment team summarise their three economic predictions for 2017 in their market outlook.
The opening quarter of the year is a time when hopes and fears for the months ahead are still fresh, but the evidence is lacking as to whether they will be fulfilled, dashed or postponed. On the economic front, our prediction for 2017 has three key features: slightly faster growth in the world economy; rising inflationary pressure; and a more aggressive policy stance from the US Federal Reserve (the Fed).
Signs that world trade is picking up are noteworthy, and potentially very positive for emerging economies. On the other hand, there is evidence that inflationary forces are strengthening and little reason to doubt the Fed’s warning that there will be three rate increases over the course of 2017. If and when President Trump’s boost to federal expenditure and his tax-cutting programme do come through, the economic stimulus could well persuade the Fed to raise rates more rapidly.
In the UK, one consequence of the decision to leave the EU is that economic developments and policy management have decoupled as uncertainty over the exact impact has led to more of a ‘wait and see’ attitude from the Bank of England (BoE). While the main features of the UK’s economy may be very similar to those of the US, and despite significantly increased growth forecasts for 2017 to 2% from both the BoE and the Office for Budget Responsibility, the BoE’s Governor, Mark Carney, has made it clear that he is not in favour of a policy response to rising inflation.
It is undoubtedly the case that the BoE’s policy equation has been made more complicated by Brexit. While the economy performed rather better last year than the authorities warned and while near-term growth prospects remain favourable, there is uncertainty around all forecasts. Rising inflation is likely to mean that household expenditure (a very important component of economic growth) becomes less of a driving force than in previous years. On the other hand, the fall in sterling has improved UK companies’ competitiveness in both export and import markets.
Equally, while a majority of commentators have been warning about an imminent collapse in investment spending, we have seen a number of positive announcements in recent months, by both domestic and overseas companies. The consensus view is that risks to growth are skewed to the downside, but we have been surprised by the economy’s resilience before and should be prepared to be surprised again.
Although growth prospects for the eurozone have also improved, the European Central Bank (ECB) has done no more than announce a tempering of the pace of quantitative easing. The problem facing the ECB is encapsulated by the massively divergent economic fortunes of the eurozone’s two Gs – Germany and Greece. For the moment, the ECB’s gaze is likely to remain more on the signs of weakness in the eurozone than on those of strength.
If growth in advanced economies does gain momentum this year – albeit modestly – those further back in the supply chain should be beneficiaries. While this may not be enough to make a meaningful difference to China (it remains mired by structural and monetary problems), other emerging and developing economies should gain more advantage. The hint of a more propitious environment is coming through in the improved trading volumes noted above. But it is still too early to confirm that we have moved into the next stage of the longer term recovery from the Great Recession.
Chief Investment Officer
Caspar Rock joined Cazenove Capital in September 2016 and is Chief Investment Officer. He joined from Architas Multi-Manager Ltd, a part of the AXA group, where he was Chief Investment Officer and responsible for all aspects of the investment activities, including investment philosophy, process and team. He also oversaw portfolio management at two of AXA group’s private banks. He previously headed up the multi-manager business at AXA Framlington from 2006 to 2008. Prior to that, he managed a range of directly invested equity and bond portfolios, and was Head of European Equities at Framlington as well as a member of the Healthcare team. He has 29 years’ investment experience.
Richard Jeffrey was Chief Economist at Cazenove Capital until he retired in January 2018.
This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
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All data contained within this document is sourced from Cazenove Capital unless otherwise stated.