Consumers make UK the G7 growth champion

27 January 2017

In case readers were expecting the latest interpretation of US president Trump’s outrageous policy announcements to dominate this week, we are afraid you may be disappointed. Given the very detailed coverage everywhere else in the media, there is not much that Tatton’s Weekly Comment would be able to add. That is except perhaps for “Keep Calm and Carry On”.

Instead of second guessing which of the trumpeted policy intentions (pardon the pun) the still highly amateurish acting president will actually find executable and what that may mean, we will focus on those news items which still constitute reality.

Firstly, it was very pleasing to learn that according to first estimates from the UK’s Office for National Statistics (ONS), economic growth ended 2016 at a better than expected annual rate of 2.2%. While in the past we would have seen this as dangerously close to the perceived ‘stall speed’ growth rate of 2%, in this decade’s slow growth era it made Britain the fastest growing economy amongst the G7 group of developed nations. What is more is that it was on an accelerating path, rather than a slowing one as disappointing figures attested for the US from their end of year accounts.

Before getting overly optimistic about the UK’s far more than anticipated consistency in growth, it needs to be pointed out that it was neither increasing exports on the back of the much weaker £-Sterling, nor companies’ expansion investment that drove the improvement but entirely the resilience of the UK consumer. Spending accelerated as the UK public appears to have put any potential concerns about the UK’s longer term prospects outside the EU firmly to one side. Unfortunately, the spending increase was not funded by income, but by credit and is therefore unlikely to be sustainable. The government’s newly announced industrial policy may therefore be more relevant than its fairly moderate measures would currently suggest. Many commentators see darkening clouds on the UK’s 2017 economic horizon as increased import prices are expected to put a dampener on the UK consumers’ spending spree.

Such concerns may be well founded, but given the UK’s trade relations with its direct neighbours and the rest of the world have not changed (yet), much will depend on economic progress elsewhere, because a global tide will lift all boats. The UK is currently very well positioned to benefit disproportionally from a global upswing and such an upswing was well under way at the tail end of 2016. So 2017 could still turn out to be another strong year for the economy unless something unforeseen reversed the positive momentum.

Yes, you have guessed correctly – we are back at the damage potential of an amateur US president. While I worry much about the rapid deterioration of political etiquette and manners across the ‘pond’, I also observe Trump’s astounding ability to reverse direction if it suits him. This is where I hope sanity returns, because first and foremost his aim is to increase the rate of growth in the US. The people in his administration are not stupid and they are likely to tell him that trade wars with his neighbours and biggest international trade partners are just as counterproductive to growing the US economy as is waterboarding torture for gaining reliable intelligence.

Markets, in my view, signalled an end to Trump’s stock market honeymoon. We experienced a marked 4% fall of the previously strengthening US$. The fact that parts of the US stock market hit new all-time highs – the Dow finally jumped over 20,000 – had much to do with the same reasons that pushed the UK’s FTSE higher when the £-Pound fell post Brexit and some very strong corporate results announcements.

On this note, at Tatton we will not let ourselves be distracted by the loud shouting from Washington (and Twitter), but instead continue to observe and assess all the real economic parameters that have recently begun to move towards long awaited normalisation.

Keep Calm and Carry On!