In this week’s Asset Allocation team observatory, Chief Investment Officer Richard Flax offers his thoughts on the Autumn Statement, the German deficit and Eurozone growth, plus a quick update on a healthy US economy.
UK Chancellor between a rock and a hard place
The Chancellor’s Autumn Statement dominated news in the UK last week. At the moment, it’s probably easier to be in Opposition than in Government. Cut taxes, as the Chancellor did, and you stand accused of eroding public services even further. Increase spending and the focus will shift to the size of the deficit and the tax burden – both high by historical standards. Focus on better-than-expected growth in 2023 and the spotlight will shift to the significant downgrade in growth expectations pencilled in for 2024 by the independent Office for Budget Responsibility (OBR). In March, the OBR expected the economy to shrink by 0.2% in 2023 and grow by 1.8% in 2024. In the latest report, the economy is now expected to have grown 0.6% in 2023 and to expand by only 0.7% in 2024. It all points to a challenging environment for UK policymakers, even if the inflation outlooks is slowly improving. The next Chancellor, whoever it is, will be hoping for a better growth outlook.
German deficit, Eurozone growth remains stagnant
Fiscal challenges aren’t limited to the UK. In Germany, the Constitutional Court issued a ruling that limited the government’s ability to use special funds to plug spending gaps. Under normal circumstances, the budget deficit can’t go above 0.35% of GDP – a level that many developed market governments can only dream of! The German government will likely find a way around this – as it has in previous years – but it’s another indication that stagnant growth in Europe is taking its toll.
American economy remains robust over the holidays
The Thanksgiving holiday in the US meant a quiet week for data and news. We did see the minutes from the latest Federal Reserve interest rate meeting though. As expected, US Central Bankers are keen to stay sober in the face of improving inflation data and there was nothing to suggest an imminent rate cut. One point we’ve been looking at recently is the difference between “hard” and “soft” macroeconomic data. Hard data means metrics like retail sales or industrial production. Soft data includes sentiment indicators. As you might guess, soft data is typically more volatile, as the chart below indicates.
Currently, the gap between hard and soft data is quite sharp. Sentiment indicators look quite weak, whereas indicators like GDP growth in the US have been pretty robust. Our current assumption is that the hard data will begin to slow in the coming months, but that’s been a widely held view for some time and the US economy has remained resilient.
Richard Flax: Richard is the Chief Investment Officer at Moneyfarm. He joined the company in 2016. He is responsible for all aspects of portfolio management and portfolio construction. Prior to joining Moneyfarm, Richard worked in London as an equity analyst and portfolio manager at PIMCO and Goldman Sachs Asset Management, and as a fixed income analyst at Fleming Asset Management. Richard began his career in finance in the mid-1990s in the global economics team at Morgan Stanley in New York. He has a BA from Cambridge University in History, an MA from Johns Hopkins University in International Relations and Economics, and an MBA from Columbia University Graduate School of Business. He is a CFA charterholder.
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