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27 February 2019

Misplaced optimism?

Markets have proved remarkably resilient given the recent economic data showing a slowdown in global growth. Investors appear to remain optimistic that the US and China will arrive at a deal in their ongoing trade dispute. Earlier this week, President Donald Trump delayed imposing any further trade tariffs on China and admitted a trade agreement between the two countries is “very very close”. On the other hand, with the official date for the UK leaving the EU just a month away, it remains unclear what deal, if any, will be reached.

Signs are that Brexit uncertainty has hit business investment. Figures from the Office for National Statistics (ONS) showed that UK growth slowed as the year went on, falling to 0.2% in the final three months of the year. All in all, UK growth in 2018 was 1.4%, the slowest rate in six years and down from 1.8% in 2017. This slowdown was largely attributed to falls in factory output and a slowdown in car production. Despite this, Chancellor Philip Hammond described the economy as “fundamentally strong” and he does not foresee a recession.

Meanwhile, according to Germany’s Federal Statistics Office, Europe’s largest economy recorded zero growth in the final quarter of 2018. Consequently, Germany narrowly avoided recession, defined as two quarters of contraction, after growth fell 0.2% in the third quarter of the year. A slowdown in the global economy affected Germany’s trade performance, with the car sector particularly weak, while consumer spending also remained subdued. Looking forward, a strong rebound in 2019 looks unlikely, although most economists expect the German economy to expand in 2019, albeit at a slower pace than in recent years.

However, it is not quite all doom and gloom, at least on the domestic front. Figures from the ONS showed that UK employment rose to a record 32.6m between October and December, up 167,000 from the previous quarter. Consequently, the jobless rate remained at 4%, its lowest rate since early 1975. Furthermore, weekly average earnings rose 3.4% to £494.50 in the year to December, meaning that wages in real terms are the highest since March 2011. Recent retail figures suggest consumers have been more willing to spend, with the amount of goods sold up 1% in January from December, helped by clothing discounts. Compared with a year ago, retail sales were up 4.2% in January, ahead of economists’ expectations.

Furthermore, there was good news for the Treasury last week, with official figures showing a record UK government surplus in January. Income from taxes beat public spending by £14.9bn in the month, the largest monthly surplus since records began in 1993. The figure was also considerably ahead of the £10bn surplus forecast by economists and will be welcomed by Chancellor Philip Hammond, who has now been given extra room for manoeuvre ahead of his Spring Statement next month.

Joel Dungate 
Investment Analyst
Misplaced optimism?

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