This week we provide the latest GDP forecasts for the UK, three other key pieces of news out of the UK, EU and US and highlight the focus of our latest investment discussions.
The Spring Statement saw the Chancellor revise up his 2018 GDP growth forecast for the UK by 0.1% on the back of momentum from 2017. However, the UK is unlikely to get back to the 1.7% recorded last year even as far out as 2022, the end of the forecast horizon for the Office for National Statistics –in fact the numbers for the last two years (2021 and 2022) were both downgraded by 0.1%. The UK has gone from leading the G7 pack to seeing the slowest growth.
As well as unveiling updated assessments of GDP forecasts (see above), Chancellor Philip Hammond acknowledged there was room for easing austerity measures due to the improvement in public finances. However, while he also stated that he would take “a balanced approach” and use any fiscal leeway he could to bear down on debt and keep taxes low, the current situation leaves only modest room for extra public spending. Any increases are likely to initially focus on health and defence and would be announced in the Autumn Budget in November.
At its latest policy meeting and after three years of buying bonds worth nearly EUR2.5tn, the European Central Bank (ECB) dropped its commitment to buying more bonds and expanding its quantitative easing programme. Mario Draghi reiterated that the ECB would not raise rates until a period “well past” the end of its bond buying programme and that, when rates did rise, the path would be “at a measured pace” that took into account continued uncertainty about the size of the output gap and how wages responded. Policymakers are now shifting their focus to a discussion on tightening and the expected path that interest rates may take.
The Senate has approved sweeping changes to the Dodd-Frank banking rules adopted in the wake of the 2008 financial crisis. The proposal provides long-awaited relief to thousands of community banks and dozens of regional lenders. It will also loosen regulations for mortgage lenders. These provisions are beneficial to all but the largest US institutions. The legislation will now move to the House of Representatives for approval where further new measures could be added given the Republican majority.
The team has begun its formal quarterly tactical asset allocation process of assessing current market conditions and economic expectations to determine whether the portfolios need to be revised. The process starts with a review of all the main regions of the world, looking at economic and political developments that could impact asset returns over the next three to twelvemonths. We have three core views framing the discussions as to where to next:
- We think the market cycle is back and that growth and inflation will be higher over the next year. So is the ‘new normal’ over?
- Higher growth and inflation should lead to higher rates, but how high and how quickly will central banks be prepared to move?
- We see stronger profits across the world, but can equities weather the potential bond market storm that we foresee?
THREE ANNOUNCEMENTS DUE THIS WEEK
21 Mar –US Fed Interest Rate Decision // 22 Mar –UK Unemployment Rate (Jan) // 22 Mar –Eurozone Composite PMI
SOURCES: BLOOMBERG, ONS, REUTERS, 7IM
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