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No pressure, but the future of the UK economy depends on your spending

High Street/PA Photos

‘My interest is in the future because I am going to spend the rest of my life there’ – Charles Kettering, American inventor, engineer and businessman.

Despite a messy week in politics with lurid headlines about both the UK’s future relationship with Europe as well as the future structure of the United Kingdom from a financial markets perspective, the party rolls on with the FTSE 100 hitting record highs during Thursday’s trading.

So is it time to crack open the champagne and celebrate your enhanced retirement pension pot?

The better interpretation is that some of the aforementioned political factors, plus events in Europe like the election in the Netherlands, have failed to hurt financial markets.

Meanwhile, the pound performed a mini renaissance as the week progressed and it recovered from comments about Scottish independence, Article 50 and the embarrassing revelations that led to the resignation of the deputy governor of the Bank of England, Charlotte Hogg. Ironically it was the Bank of England themselves who helped spark the pound’s upward push on the week after their latest interest rate disclosures on Thursday.

The value of the pound enjoyed a ‘renaissance’ this week. (Yahoo Finance UK)

Unsurprisingly interest rates remained at rock bottom levels, but there was one dissenting voice as soon-to-leave voting member of the Monetary Policy Committee, Kristin Forbes, observed that in today’s UK economy: “(P)rice acceleration is combined with today’s much tighter labour market, and potentially greater difficulty in attracting workers from the European Union…inflation risks have clearly increased.”

She certainly has a point. Inflation has picked up recently thanks to higher energy prices and the lower pound. However, central banks are not just inflation slayers as we saw by the Bank of England’s dramatic interest rate cut and stimulus expansion last August, as fears swirled about the shorter-term prospects for UK economic growth in the aftermath of the Brexit referendum vote.

Other UK data out this week showed that average weekly earnings grew 2.2% in the three months to the end of January, down from 2.6% the last time these numbers were released.

Now this is bad news, particularly as the scope for negative real wage growth (headline wage increases minus the rate of inflation) which has been a characteristic of large swathes of the last decade is clearly apparent. You do not need a PhD in economics to know that with consumption spending typically between 60-70% of UK growth, this is not good. This is why Sainsbury’s noted in a trading update this week that, “…the (food retail) market remains very competitive and the impact of cost price pressures remains uncertain.”

“…the (food retail) market remains very competitive and the impact of cost price pressures remains uncertain.”

Still there is some spending out there, and it is coming from an unusual source. I was surprised to read in a report from a US investment bank that having undertaken a survey of EU referendum voters, ‘Remainers’ have increased their spending by more than ‘Leavers’, despite having a much more pessimistic view about the impact of Brexit on the UK economy.

Assuming this extra spending is not all on alcohol to help dull the pain of the UK’s seemingly inevitable exit from the European Union, it seems you cannot keep a good spender down. More seriously it goes to show how factors like the already-mentioned rock bottom interest rates as well as low headline unemployment levels can also have an influence.

What is all comes down to ultimately – as with so many aspects in the financial markets – is confidence. I noted in last week’s column the recent UK Budget pushed up this year’s economic growth expectation, while cutting those for the next three years. That’s a mixed backdrop for you and me to decide how to spend and additionally for any corporate out there to invest and employ more people.

As I observed last week I think this drives compromise and a ‘soft Brexit’ in the upcoming negotiations with the European Union, but that’s a story for 2018 and 2019. For the UK economy and stock market to make further progress this year, you and I are going to have to get out there and keep on spending.

So are you feeling confident or not?

Chris Bailey has over 20 years of investment industry experience at long-only and long-short institutions as a global multi-asset fund manager, strategist/macro thinker and, in the earlier part of his career, as a securities and fund analyst.

In 2013 he founded Financial Orbit focusing on daily macroeconomic comment and securities analysis. In December 2016 his Twitter account (@financial_orbit) was named as one of the ’50 accounts investors should follow in 2017’. 

The content on this page does not constitute financial advice and is provided for general information purposes only. Nothing on this page should be regarded as an offer to conduct investment business or to buy/sell any investment.