Vanessa Hale
Director, Research
Information on the ongoing Brexit negotiations is extremely opaque but signs suggest there is significant disagreement within the Cabinet. The absence of a majority for Prime Minister Theresa May further weakens her authority and negotiating position. This lack of clarity on Brexit, party infighting and question marks over how long the current Prime Minster will be in charge are all going to increase uncertainty within the UK.
In Europe, Spain is in a period of significant political unrest as the Catalan independence movement has gained momentum and in Germany, Angela Merkel has secured another term as Chancellor of Germany, even with a reduced number of seats. This is likely to bring an element of stability as she represents the status quo and the result has huge implications for Brexit negotiations given Germany’s prominent position within Europe. It will become especially important for when the UK is discussing a trade deal with Europe.
Outside of Europe, relations between Russia and the US are worsening, partly because of tensions in the Middle East but also the accusations, which are gathering in terms of momentum and evidence, of alleged Russian interference in the US presidential election. Furthermore, there remains considerable concern over the escalating situation between the US and North Korea and relations between Qatar and the surrounding Middle Eastern States. American politics continue to be dominated by arguing within Trump’s inner circle and high staff turnover. Although these international issues may not directly affect the domestic market they will indicate the direction that world politics and the world economy may take, which will have knock on impacts in the UK and on Brexit negotiations.
The World Bank forecast that UK economic growth will be 1.7% over the course of 2017 and business confidence has been fluctuating over the course of the year, showing signs of recovering from the initial shock of Brexit. The rising costs for businesses (apprenticeship levy, business rates, living wage), coupled with the weak exchange rate, may still impact the market, both by increasing costs for domestic firms and making imports more expensive.
In 2017 inflation has been above the Bank of England’s target rate (2%) for most of the year to date. The British Chamber of Commerce expects inflation to reach a peak of 3% before the end of 2017 and it is expected to outpace earnings until 2019. This will erode real wages and is likely to result in lower consumer spending. This is particularly worrying considering consumer spending is a key driver of economic growth.
The Bank of England finally increased the official bank rate – from 0.25% to 0.5% – the first interest rate rise in over ten years. The rate remains very low by historic standards, but it will increase mortgage rates for some households, as well as increasing savings rates for others. Financial markets are indicating two more interest rate increases over the next 3 years, taking the official rate to 1%.
The FTSE 100 is still looking positive and has registered another set of strong growth figures for Q3 2017, although this has been variable since the EU referendum. And as for productivity and unemployment, unemployment remains very low whilst productivity has fallen.
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