As we enter 2018 it is conceivable that the world’s leading economies will continue to display strength and resilience. The US economy is strong and the eurozone economies are improving along with an increase in global trade. This improvement among developed economies should also have a positive impact on the manufacturing economies of East Asia as well as commodity producers in other emerging nations as their goods are exported to these developed nations.
Some economic points to consider below:
United States
- A 16 year low in unemployment at 4.2% in September 2017.
- Low inflation. A key moment will come in the spring of 2018, when 2017’s price declines will fall out of the 12-month (year-on-year) comparison.
- The underlying problem is possibly slow growth of money and credit.
- However, this should not pose a problem provided that core inflation starts to pick up again in 2018. This in turn will underpin moderate real GDP growth in 2018.
- There is good reason to expect the current expansion in the US has further to go and could actually become the longest business cycle expansion in US financial history.
- The only real threat to this prospect is the possibility that the Fed and other central banks could make a mistake and restrict credit and raise interest rates too much during monetary policy normalisation. This could cause a slowdown in 2018-2019.
Eurozone
- Economic activity in the eurozone is at last expanding at a momentum close to its potential.
- To sustain economic momentum, commercial banks need to create credit more rapidly than at present. Otherwise, when the ECB starts to taper its quantitative easing, credit growth could weaken substantially.
- Even though the economies of the single currency area may have recovered, the basis for sustained growth is fragile. The risk, therefore, is that tapering quantitative easing purchases will lead to a renewed and damaging slowdown in monetary growth, resulting in the inflation rate declining further beneath its target of 2%.
United Kingdom
- UK economic growth picked up a little in the third quarter of 2017 after a sluggish first half, but still remains below its recent trend. However, the British economy is likely to remain positive over the next 12 months by increased elements of consumer and business spending.
- The Bank of England has managed liquidity to create economic growth and the weaker pound has enabled the manufacturing export sector to be higher than expected.
- Unemployment is low as the economy continues to generate good job growth.
- However, with money and credit expansion accelerating, locally generated inflation could be added to rising import prices. Therefore, it is likely that growth in the UK will remain relatively low until the uncertainties of the Brexit negotiations are overcome.
Japan
- The Japanese economy has had a decent run lately with real GDP increasing for six consecutive quarters. This is the first such extended stretch of growth for over a decade.
- Whilst unemployment remains low it is expected that low wage growth will continue.
- Despite huge quantitative easing by the Bank of Japan, inflation is likely to stay weak and below the central bank’s 2% target, but should stay above zero.
- Economic growth for 2018 should remain stable but lag behind the US and eurozone.
China and Emerging Asia
- Both China and emerging Asia are likely to benefit from a modest increase in global trade. This is unlikely to be enough though to become a commodity boom in 2018.
- China is the largest emerging market and the biggest buyer of commodities on world markets. The growth of China’s imports is important to numerous developed and emerging commodity exporters around the world.
- If China can undergo a steady domestic recovery over the next year or two, the outlook for those commodity-exporting economies will improve considerably.
The Effect on Global Stock Markets
- If inflation remains low, monetary policy can remain looser (the actions of the central banks to control the flow of money in the economy) and interest rates may not need to rise too much. This would mean that recession is less likely, and a ‘bear’ market therefore would not be imminent.
- We could therefore see a period of low returns rather than a downturn in markets. However, if inflation does rise further causing higher interest rates, it is very likely that we will experience a bear market and a correction / downturn in the stock-markets.
The Service we provide for our clients
- As always, we believe investors should remain focussed on the medium to long term, investing over ‘time’, rather than trying to ‘time the market’.
- Through our research at Loughtons, supported by the expertise of Morningstar, we focus on the intrinsic value of a particular asset. We continue to assess the quality of any investment opportunities which come about as the result of our investment process and strict fund selection criteria. A long-term outlook when investing is clearly desirable, as short-term expectations can turn out to be unrealistic where events cannot be anticipated.
- Therefore, active management remains important and generally volatility can be partially mitigated by diversifying investments across a broad range of asset classes that include equities, commercial property, fixed interest securities (bonds) and cash to spread risk even further.
- We will always look to ensure that clients have a portfolio that reflects their requirements which is based on their attitude to risk and capacity for loss, whilst considering what the impact the current stage in the economic cycle has on the exposure to various assets.
For clarification of any points discussed above and any future independent advice regarding your own financial planning, please do contact us on 01626 833225 or email [email protected]
Important Information
The views and opinions contained herein are those of Loughtons Independent Financial Advisers and may not necessarily represent views expressed or reflected in other economic communications, strategies or funds.
This document 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 Loughtons Independent Financial Advisers does not warrant its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or restrict any duty or liability that Loughtons Independent Financial Advisers has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system.
Loughtons Independent Financial Advisers is a trading name of JPRS (South West) Limited. JPRS (South West) Limited is authorised and regulated by the Financial Conduct Authority.