A decade on from the beginning of the financial crisis and the UK consumer is struggling as wage growth stutters and inflation eats into the purchasing power of savings. Consumers are feeling the squeeze, which is why economic growth has been under pressure this year. The International Monetary Fund (IMF) has noticed, and just downgraded its growth expectations for the UK.
There’s been a rotation in the distribution of economic growth so far this year, as momentum swings away from the US and UK.
Europe’s growth forecasts have been upgraded, underpinned by a stronger economy and quieting of political risk. The economic outlooks for China and Japan were also given a boost.
Scepticism over the nature and timing of fiscal and economic policies meant the IMF downgraded growth estimates for the US, although these numbers are still ahead of 2016’s lacklustre performance.
America has the power to dictate financial sentiment across the world and knee-jerk reactions to US news are usually found in UK markets.
However, cast your gaze beyond the UK and the global economy looks pretty healthy. The question mark hanging over the sustainability and strength of global growth has vanished, with the IMF retaining its growth forecasts for this year and next, at 3.5% and 3.6% respectively.
Global diversification is a way for investors to reduce risk in their portfolio. If you only have investments in the US, you may be more nervous now than you were at the beginning of the week. However, if your portfolio spans geographies, asset classes and sectors, you may be more calm, confident in the hope that any losses will be made up with gains from elsewhere.
UK downgrade
After showing strong resilience in the face of Brexit uncertainty last year, the UK got off to a shaky start in 2017, with a “tepid” first-quarter performance of 0.2%.
In the year since the Brexit vote, GDP per head is up 1%, and is just 1.9% higher than before the 2008 financial crisis1.
Growth figures from the second quarter were an improvement at 0.3%, which equates to around 1% if annualised, driven by retail trade, and film production and distribution. Apparently Wonder Woman played her part – not only did she put a stop to the “war to end all wars” in London, but she also gave the napping UK economy a little push; what a woman.
Although an improvement, these numbers concern me. The construction and distribution figures are weighing on momentum, which is worrying as the UK gets into the swing of Brexit negotiations – think EU migration, trade deals and the impact of a weak pound on the cost of importing materials.
I won’t splutter my morning coffee out in surprise if the IMF takes another red pen to estimates in its autumn update, but this could be avoided if the Eurozone decides to gorge on UK exports, fuelled by its stronger economic growth.
Brexit outlook
The big issue is that we have no idea how Brexit negotiations and the eventual divorce will play out. I sometimes worry that my pre-teen children could still be struggling with the fall-out as they take their first steps into adulthood.
But looking to the present and the problems faced by consumers are clear to see. Driven by the weaker pound, inflation and stagnant wage growth has squeezed consumer spending. Inflation eased back from 2.9% to 2.6% in June, but it’s still ahead of the Bank of England’s 2% target.
Brits are having to pay more for the same products, but their wages are hardly moving to accommodate for it.
Chancellor of the Exchequer Philip Hammond said the consumer squeeze was “passing through the economy” this week, which may not be too much comfort for many Brits.
1 International Monetary Fund, World Economic Outlook
