The world as we know it? Summer 2018

It is turning into quite a remarkable summer 2018, and not always for good reasons. Where do I start to place all of this in context?

The headlines thus far are the long spell of hot weather, reminding me of summer 1976, the football World Cup and England's gallant progress through the competition, and of course our Government's Brexit positioning. We can also add to this list the rise and rise of waistcoat sales, thanks to Mr Southgate, and very much more importantly, the successful negotiations in the Korean peninsula, which cooled geo-political tensions for a very short time, have also made the national and international headlines.

The less welcome headlines from an economic viewpoint are the beginning of trade wars between America and it seems most other economic trading partners, of course led by President Trump. His visit to London in July looks to be a volatile encounter, with many planned protests. I think our Government could not have timed the visit better to drown out the noise of resignations following the final Brexit paper bound for Brussels. Their 'approval' seems muted and it is clear we still have many hours of negotiation before we leave the EU in 2019. The media frenzy does not support confidence of either business or the consumer and this has subdued spending and investment by some.

The senior team at Chapters Financial meets and is briefed on the current economic climate and its data in order to inform our 'house view'. We aim to meet once a quarter and to ensure our process remains robust, we also use the services of an external consultant, Steve Williams of Cormorant Capital Strategies. For information, their website can be found here:

Steve Williams produces a regular macro-economic review document and, with his kind permission, this is reproduced here. We find these updates helpful in considering the current economic conditions.

We asked Steve for his current views on the current market position this summer, taking into account the overall growth that many areas have seen in recent times. As an example, from a US perspective, he recently noted:

… I'm working on the assumption that this bull market will last only as long as the US economy is expanding.

And right now, the US economy is flying. The Federal Reserve Bank of Atlanta's 'nowcast' model is reflective of output growth in the region of 3.8 percent. The average of forecasts for 2018 comes in at 2.9 percent compared with growth in 2017 of just 2.3 percent. Meanwhile, I'm slightly more optimistic than the average in guessing that growth will touch 3.0 percent. That would see Donald Trump's first full calendar year as President coincide with the highest level of economic growth in the 10 years since the Great Recession.

Mind you, I'm not universally optimistic. The consensus holds that the Trump stimulus will prove temporary, with the current year representing something of a peak. That feels about right to me. Indeed, that's pretty much what the yield curve is telling us.

We all understand that the globe is created by many diverse nations (and their respective economies) and for other areas, Steve also recently noted:

  • The UK economy is growing at a slowing pace with above target inflation and low unemployment.
  • The euro zone economy is growing at a moderate pace with moderate inflation and high unemployment.
  • The Japanese economy is growing at a slow pace with near zero inflation and low unemployment.
  • The Chinese economy is growing at target rate with moderate inflation and low unemployment.

No individual asset allocations or recommendations are provided during the course of this article

Looking at the UK, it is widely anticipated that another rise in the Bank of England base rate is due and this could be in August 2018, although some expect the current rate of 0.50% to be held for a little longer. The Monetary Policy Committee voted by a majority of 6-3 in June to maintain the base rate at 0.50%; it is interesting to note that the decisions in May and March 2018 were voted in by a stronger majority of 7-2, and indeed that the February decision to maintain base rate was unanimous. The challenge for the Bank of England will be to maintain a balance – too sharp a rise now could put pressure on the UK economy and consumers; however, leaving it too late could allow inflation to become entrenched, making it harder to control and potentially forcing the Bank to make sharper hikes further down the road.

Some central banks (America, China & Canada as recent examples) have been gradually raising base rates from historic lows over 2018. This might be a welcome change for savers who have endured historically low deposit returns for many years, but not so welcome for borrowers.

As we have noted before, one major global focus for 2018, possibly not on everyone's immediate scope at this point, will be the United States midterm elections in both houses in November 2018. It is widely agreed that the results of the midterm elections will be hugely important both in terms of the Trump presidency and in shaping the US political agenda for the years ahead. If the Republicans lose control of either the House of Representatives or the Senate, the party's ability to push through legislation would be severely hampered. Were the Democrats to win control of the House or the Senate, they would have the opportunity to reject new bills and could also gain subpoena power, which could prompt a more detailed and determined investigation of the Trump administration.

We hope that this update is helpful. As you would understand, this provides no guarantees of future performance, provides no individual advice, but does provide an insight into current economic conditions.

Keith Churchouse FPFS


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