An economic update Craig Botham, Economist May 2017

Transcription

1 An economic update Craig Botham, Economist May 2017

2 2016 image of the year Donald and Nigel at Trump towers Source: Splashnews.com. 1

3 Key issues UK: the election, Brexit and beyond Europe: out of the woods? President Trump policy uncertainty and macro implications What are we missing? Asset allocation Source: Schroders. 2

4 Synchronised global upswing Developed markets vs. emerging markets PMIs Source: Thomson Datastream, Markit, Schroders Economics Group, 27 March Thomson Reuters Datastream, Schroders, updated 28 April

5 Global growth forecasts Forecasts holding up (for once) Source: Thomson Reuters Datastream, Schroders, updated April

6 UK - The election, Brexit and beyond

7 UK general election to clear the way for softer Brexit May to gain 100 seat majority and Brexit breathing space 5-poll moving average (% share of popular vote) 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Jun 16 Jul 16 Aug 16 Sep 16 Oct 16 Nov 16 Dec 16 Jan 17 Feb 17 Mar 17 Apr 17 Con Lab UKIP Lib Dem Others GBP: the Brexit barometer GBP/USD Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Source: Schroders Economics Group. 20 April

8 UK economy deteriorating inflation set to rise further Schroders UK CPI forecast Y/Y 6% 5% 4% 3% 2% 1% 0% -1% -2% Core Food, Tobacco and Alcholic beverages Energy UK CPI Source: Thomson Datastream, ONS, Schroders Economics Group. 27 March

9 UK economy deteriorating Consumption drivers under pressure, investment is weak Disposable income vs. savings rate y/y 12% 10% 8% 6% 4% 2% 0% Investment slows as uncertainty rises 4q/4q 15% 10% 5% 0% -5% -10% -15% -2% -4% Real household disposable income Savings rate -20% UK household consumption UK business investment Source: Thomson Datastream, ONS, Schroders Economics Group. 4 April

10 Deal or no deal? The macro environment to 2019 and beyond Near term: weaker sterling and higher inflation slow consumption Negotiation period: : uncertainty to weigh on activity (capex vulnerable) Low interest rates persist with periodic bouts of GBP weakness 2019: no deal (cliff edge), UK goes to WTO status, stagflation environment as tariffs rise 2019: no deal, but agreement to keep talking (transition period), growth and rates firm If deal struck in 2019, UK growth picks up and rates begin to normalise Ability of economy to grow without inflation depends on trade and migration deal Source: Schroder Economics group, The Times. 9

11 Beyond Brexit Case study: competitiveness in the UK and Germany UK Q Q = 100= Germany Q Q = 100= Sterling Sterling nominal nominal effective effective exchange exchange rate, rate, 1q MA 1q MA Sterling Sterling real effective real effective exchange exchange rate, rate, 1q MA 1q MA Euro Euro nominal nominal effective effective exchange exchange rate, rate, 1q MA 1q MA Germany Germany real effective real effective exchange exchange rate, rate, 1q MA 1q MA Note: All exchange rates are trade weighted, real effective exchange rates based on relative unit labour cost. Source: Thomson Datastream, Schroders Economics Group, 10 March

12 Eurozone out of the woods?

13 Growth booming Eurozone GDP vs. BNB survey and PMIs 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% -6% -6% Eurozone GDP growth, Y/Y Belgian National Bank survey (standardised) Markit PMI, EZ Composite (standardised) Source: Thomson Datastream, Markit, Belgian National Bank, Eurostat, Schroders Economics Group. Updated 27 March

14 Inflation is close to its peak Energy base effects have caused inflation to rise, but only temporarily Y/Y 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Core Food incl. alcohol & tobacco Energy Headline Source: Thomson Datastream, Eurostat, Schroders Economics Group. Updated 27 March

15 Eurozone has resisted populist pressure so far A roadmap and guide to upcoming events Country Event risk Date Probability Market impact Hungary Migrant quota rejected in referendum 2 October 2016 High Low Austria Re-run of presidential election with far-right Freedom party winning 4 December 2016 Medium Low Italy Constitutional referendum, leading to Renzi losing his job 4 December 2016 Medium Medium Netherlands General election with the Party for Freedom calling an EU referendum 15 March 2017 High Low UK Article 50 triggered By end of March 2017 High Low France Presidential elections with Front National winning 23 April and 7 May 2017 Low Extreme UK Snap general election with the Conservative party losing its majority 8 June 2017 Low Medium Germany Federal election with Alternative for Deutschland winning 24 September 2017 Very low Extreme Italy 5 Star Movement wins Italian election By May 2018 Medium High Source: Schroders Economics Group. 20 April

16 Five star have taken the lead in Italy Elections due by May 2018 spell trouble for the eurozone Share of popular votes (10-poll moving average) Jan 16 Mar 16 May 16 Jul 16 Sep 16 Nov 16 Jan 17 Mar 17 5 Star Movement Democratic party Source: Wikipedia, Schroders Economics Group. Updated 24 March

17 Structural problems will weigh on Eurozone after the elections No one can keep up with Germany Relative wage costs 1 Germany: soaring trade surplus 2 1 Source: Thomson Reuters Datastream, Schroders, updated 28 April Source: Thomson Reuters Datastream, Schroders, updated 15 February

18 US can Trump deliver?

19 Return of animal spirits in the US Confidence has surged in the US and capex is likely to follow Index 120 Index %, y/y %, y/y Recession Recession Recession Recession US consumer confidence US consumer confidence US non-res private US fixed non-res investment private fixed growth investment growth NFIB small business NFIB optimism,rhs small business optimism,rhs CEO economic CEO outlook economic survey, outlook 1Q lag, survey, rhs 1Q lag, rhs Source: Thomson Datastream, Schroders Economics Group, 23 March

20 But 4% growth is a long shot Economy has not grown at 4% since 2000 % % growth GDP growth (4q/4q) Source: Thomson Reuters Datastream, Schroders Economic Group, 27 March year moving average 19

21 As is the promise to create 25 million jobs Late cycle US has limited labour market capacity Million Source: Bureau of Labour Statistics, Thomson Datastream, Schroders Economics Group. 24 March Unemployment level, U3 Unemployment level, U6 25m aim

22 What are we missing? Risks

23 Is the market complacent? Fed tightens, but volatility falls to new low Source: Thomson Reuters Datastream, Schroders, updated 28 April

24 US rates could rise considerably further Taylor rule says 3.5% by end

25 Fed rate setters expect 3% Market does not believe the dots 24

26 Global liquidity could continue to rise Even as the Fed shrinks its balance sheet 25

27 Central banks stay easy while inflation remains quiescent Wages remain contained despite low unemployment Source: Thomson Reuters Datastream, Schroders, updated 28 April

28 Asset allocation views Global Market Perspective Q Equity + Bonds - Alternatives + Cash 0 By region By Sector By Sector US 0 Government - Commodities + Europe ex UK + US - Gold 0 UK 0 Eurozone Bunds Gilts -- (-) - UK Property EU Property - + Pacific ex Japan (AUS, NZ, HK and Sing.) 0 Inflation-linked 0 Japan 0 (+) Investment grade - Emerging Markets + (0) High Yield 0 Emerging market (USD) 0 Emerging market (LC debt) + (++) Key: +/- market expected to outperform/underperform (maximum ++ minimum ---) 0 indicates a neutral position. The above asset allocation is for illustrative purposes only. Actual client portfolios will vary according to mandate, benchmark, risk profile and the availability and riskiness of individual asset classes in different regions. (Last quarter). Source: Schroders Global Market Perspective, April

29 Important information For professional investors and advisers only. This material is not suitable for retail clients. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and these may change. The data contained in this document has been sourced by Schroders and should be independently verified before further publication or use. This presentation is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but Schroder Unit Trusts Limited (Schroders) does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Reliance should not be placed on the views and information in the document when taking individual investment and/or strategic decisions. The forecasts included should not be relied upon, are not guaranteed and are provided only as at the date of issue. Our forecasts are based on our own assumptions which may change. We accept no responsibility for any errors of fact or opinion and assume no obligation to provide you with any changes to our assumptions or forecasts. Forecasts and assumptions may be affected by external economic or other factors. Issued in May 2017 by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA. Registered No: England. Authorised and regulated by the Financial Conduct Authority 28