United Kingdom
GDP growth of 1.8% was booked for 2017, the weakest since 2012. It is forecast to fall to 1.5% by 2019. The pound has strengthened against the US dollar and the euro is responding positively to further progress in the Brexit negotiations.
However, with wage growth effectively flat when adjusted for inflation, consumer confidence remains weak. Consumption has been supported by debt, although there are already signs of a slowdown in the growth rate of consumer credit issuance. Early evidence of this trend is falling car sales and lower mortgage approvals. Despite the weaker outlook, the Bank of England was split at the latest meeting, voting 7-2 in favour of holding interest rates at 0.5%. A hike of 0.25% is possible in May. However, with inflation off its recent high and likely to fall further in the coming months, following a stronger pound and stability in commodity prices, the timing of an additional hike is in doubt.
Europe
Annual GDP growth rose from 1.8% to 2.3% for 2017, the best outcome since 2007. Economic output has been boosted by declining levels of unemployment. It fell to 8.5%, the lowest since 2008.
However, there remain large regional differences. German unemployment is at 3.5%, whilst the rate is over 10% in Italy and Spain, despite recent improvements. Although economic performance has been relatively strong in Europe, there has been some evidence of weaker data in the first quarter, indicating that growth may have actually peaked. Purchasing Manager Index survey data fell to levels not seen since early 2017 with weakness seen in services and manufacturing, partly reflecting a decline in new order growth. Industrial production also fell, albeit from high levels at the start of the year. It is notable that the European Central Bank is now considering unwinding its Quantitative Easing policy.
United States of America
GDP expanded 2.3% in 2017, up from 1.5% in the previous year. The growth rate is expected to improve further with corporate earnings showing strong momentum following tax reform.
The Federal Reserve raised rates by 0.25% to a range of 1.50%-1.75%, reflecting a need to constrain inflation but also growing concerns about financial stability. At least two more rate rises are expected this year with more seen in 2019 and 2020. The dollar has remained weak. Although the US is well ahead of other economies in terms of raising interest rates, this has been offset by the fact that the tax cuts are set to be financed by further debt issuance at a time when the Federal Reserve is backing off from bond reinvestment. Durable Goods orders and Industrial Production remain strong. Weakness in retail sales highlights the struggles of the consumer despite support from growth in consumer loans. We note a levelling off in the growth trend of housing activity over the last six months which could provide another concern for policymakers.
Japan
Annual GDP growth of 1.7% was the best result since 2010 with growth in consumption and investment offsetting a slowdown in government spending.
The net export performance was also the strongest since 2010. Japan has now experienced eight successive quarterly periods of positive growth, the best run in nearly thirty years. The Japanese central bank suggested a potential review of monetary policy, should core consumer inflation rate hit the 2% target by 2020. This is not an imminent cause for concern, given that core consumer inflation is running at only 1%, although renewed weakness in the yen could increase input prices. Additionally, pipeline inflation has now fallen for the last three months; weaker input prices are likely to result in lower consumer inflation, at least in the short term. Without a firmer commitment to tighten monetary policy, the environment is likely to remain supportive for Japanese stocks, in particular exporters.
Far East
Data in the first quarter has been mixed, although part of the monthly volatility is down to distortions caused by the timing of the Chinese New Year.
Gains in Capex and Industrial Production were offset by disappointing Retail Sales. However, all measures are low by historical standards, in line with a lower level of GDP growth. The latest Purchasing Manager Index survey data disappointed with the report citing weaker output growth in both services and manufacturing. Whilst sentiment remained strong in the manufacturing sector, it was notably weaker in services. Following talks between North Korea and China, there are evident signs of easing tensions in the region, a factor that could prove to be positive in the long-term.
Emerging Markets
We remain positive on the long-term prospects of emerging markets in general as we expect them to continue to provide higher levels of economic growth, helped by favourable demographics.
Purchasing Manager Index survey data in India showed some stability after recent weakness with improving growth trends seen in services and manufacturing. In Brazil, survey data show that manufacturing is performing strongly, although the services sector is experiencing some weakness. There has been a surprise increase in unemployment which is likely to hinder GDP in the short term. However, the stock market has been one of the best performers in the first quarter as investors remain optimistic about long-term prospects. Relations between Russia and leading western countries deteriorated following the spy poisoning allegations in Salisbury. Further US sanctions have hit confidence in the rouble and Russian stock market.