UK

The Bank of England delivered a hefty upgrade to the UK’s 2017 GDP forecast, lifting its projections from 1.4 per cent to 2 per cent because consumer spending has proved surprisingly resilient since the referendum. It also revised up estimates for the next two years. It expects the household savings rate will continue to fall to record lows over the three years and consumer spending is central to its forecasts.

UK’s inflation rate hit its highest level in two and a half years in January at 1.8 per cent as the impact of a weaker pound and rising energy prices were increasingly passed on to consumers, although this was softer than economists predictions of 1.9 per cent. The Bank of England expects inflation to hit its target rate of 2 per cent this month, 2.7 per cent this year, falling to 2.6 per cent in 2018 and 2.4 per cent in 2019.

Rising food and fuel prices in Britain contributed to a second consecutive month of falling retail sales in January, indicating higher prices and cost price inflation are starting to eat into household spending power due to Higher commodity and import prices arising from the fall in the pound. On an annual basis, retail sales grew just 2.6 per cent, down from expectations of a 3.9 per cent jump

A top Bank of England official has said that she is growing uncomfortable with ultra-low interest rates and that stronger growth and higher inflation would quickly prompt the bank to raise them. This will be especially so since growth and unemployment has only picked up slightly since the Bank lowered rates last year.

Service sector makes up around 80% of UK GDP. That dipped in 2016 post the referendum but now showing signs of good recovery.

Brexit and UK’s relationship with the EU

The EU is by far the UK’s largest market. The value of UK goods exported to the EU is about the same as its exports to the rest of the world, whilst imports from the EU total more than that from all other countries combined. Aside from the EU, the UK has a relatively weak trade position in other markets, including the Commonwealth countries and the US and it is now attempting to redesign its trade relationship after 44 years of being part of the EU.

This is a difficult time for the UK since it will be losing its strongest trading partner and the effect on the Sterling reflects the uncertain sentiment shown by investors towards the future of Britain’s economy. Although the UK economy has been resilient since the elections and defied most economists’ expectations by posting better-than-expected growth and unemployment figures and the Bank of England lifting its projections for 2017 GDP forecast growth from 1.4% to 2%, cost inflation due to a deflated Pound and higher commodity prices are starting to take a toll on household incomes (predicted to rise to its target rate of 2% in February 2017 and 2.7% by the end of the year) and most recently, we saw a second consecutive month of falling retail sales in January.

As the Bank of England have confirmed in previous MPC meetings, the interest rate could go either way and there is now speculation that an interest rate hike may happen this year if inflation begins to increase beyond its target rate – cautiously however, since although tighter monetary policy strengthens the Sterling it will also impact borrowing and consumer expenditure that needs to remain strong. The real strength, however, lies within the type of trade agreements and deals the UK can achieve with the its biggest trading partner despite its decision to leave the EU, in order for the Sterling to somehow be able to return to its Pre-Brexit levels.

The Prime Minister has stated that the UK wants ‘to continue to trade with the EU as freely as possible, to co-operate to keep our countries safe, to promote the values the UK and EU share — respect for human rights and dignity, democracy and the rule of law both within Europe and across the wider world, to support a strong European voice on the world stage, and to continue to encourage travel between the UK and EU’. She has also mentioned however that she would prefer ‘no deal’ as opposed to a potential ‘bad deal’, so it is quite clear that she will fight against any punitive stances taken and ensure a fair deal is negotiated by all.

Bank of England Governor Mark Carney’s argument centres more around hedging. The fear is that without a post-Brexit market access deal, European banks and businesses would find it harder to tap Europe’s dominant derivatives market located in the City and find essential products to manage their balance sheet risks. If banks and businesses on the continent suddenly found themselves cut off from the City, and so from these services, it could cause “unforeseeable moves in markets,” he said. A hard Brexit could also drain market liquidity, raise doubts over the validity of cross-border insurance contracts and generate alarm by obscuring financial exposures.

What about the US?
The UK runs an overall trade surplus with the US of about £14bn annually, with the main goods exported being pharmaceuticals and cars. The new President has promised to shrink the US trade deficit, talked about challenging the high price of pharmaceutical products and is taking measures to repatriate manufacturing production — particularly of cars. Trump’s protectionist stance is unlikely to work well with the UK, making the UK an unlikely strong trading partner.

Dollar/Pound

This month the pound has weakened against the dollar amongst data in the UK that growth is softening especially in retail and that the inflationary impacts of a weaker sterling are starting to impact consumer incomes. The dollar continues to gain momentum as the President continues to impose reforms that boost sentiment towards the future of the US economy.

Stock Markets

US Stock markets such as the S&P 500 and the Dow continue to hit record highs and equities are rallying as a result of bullish investment behaviour in response to the proposed reforms put forward by the President during the elections regarding boosts to fiscal spending and tax cuts, all to grow the US economy and boost industry and manufacturing. Oil stocks have been keeping the markets alive as the price of oil edges up following a production cap and several retailers have posted better than expected results. Bank stocks have seen some strength as a result of more potential rate hikes in the US and reforms being made to the Dodd-Frank Act.

UK indexes have also been strong, although FTSE dipped as HSBC posted disappointing results.

Crude oil
Despite strong dollar strength (that pushes down demand and the price of oil as oil is denominated in USD) crude oil has remained strong – trading around $55-$56 a barrel.

Gold
It has been a strange month for Gold, typically held as a safe-haven investment, rising this month together with USD and US stocks. Analysts believe that this phenomenon may have something to do with questions around the USD potentially being overbought or only showing true strength when compared with other weaker currencies such as GBP and EUR that as a result of Brexit and the French elections (that could impact the European single currency), are deemed risky and the future is uncertain.

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