WEEKLY COMMENT 16-02-2017
By Barry Edwards
2017 Reality Check
The first six weeks of 2017 has produced abundant comment about the potential or looming disaster of the world economy that we have seen for some time. Those people who analyse financial and economic events have been prolific in their pronouncements and it is difficult to gather a general consensus for the direction or trend of what the future holds. Events such as Brexit and the election of Donald trump with the rise of populism throughout the developed world have created an environment that presents so many possibilities that accurate prediction is unfathomable.
Forecasting the economic future of countries and the world has never been an exact science and has come under severe criticism on many occasions from all quarters. However, there was at least in the recent past a consensus of information on which to base forecasts, whereas currently nobody can honestly say that there is a clear path forward for the next year or so. That is why the comment is so varied and contradictive that any person looking for guidance is very confused and that goes for me personally.
In situations like this a lot of the facts get ignored, therefore, this weekly comment is going to present a synopsis of those relevant facts and try to make some sense of them. The first major upset was Brexit which has spawned such a lot of discussion that many people are totally confused. The general opinion is that the EU is a disaster and will collapse into chaos during this year as the populist movements destroy the original purpose of the union. You will struggle to find a unified view politically and even Trump is joining in with the possible disintegration theory.
If you look behind the headlines, there are some very positive economic facts being announced by governments around the EU together with the European Central Bank (ECB) and Eurostat, the official statistical department of the EU. Unemployment is now well below 10% and youth employment is gaining pace at a rate not seen since the financial crisis. Economic growth has gradually been improving over the last year and the forecast for the whole EU is now 1.8% for this year improving to 2.3 % next year. That is similar to the UK and the outlook is for that to improve slightly over the near term. Some economists believe that the USA will expand rapidly over that time having a knock on effect on Europe which will increase that growth forecast even further.
That does not create the circumstances for a disintegrating EU when people are finally beginning to see an improvement in their own economic well-being and a better future than they have seen for nearly ten years. This is extremely inconvenient news for the media commentators expounding chaos for the EU which is why you probably have not been made aware of it.
The second major upset is obviously the election of Trump. His first three weeks in office have attracted so much criticism for a newly elected president that it is unprecedented. Much of it seems fully justified but nobody outside his close circle has any idea what the grand plan is beyond his promises on the campaign trail. Despite that the economy is booming, unemployment is at its lowest level ever and the stock markets are hitting new highs every day at the moment. It seems business believes Trump is on their side and the economy will grow rapidly as a result. Investors and fund managers are of the same opinion which makes it hard to justify the calamitous political management with the rosy expectations of the economy.
Needless to say, there is no shortage of people saying ‘it will all end in tears’. The fundamentals which are the basis for investment are all showing similar levels to the 1929 crash but that does not seem to deter the exuberance purveying the financial community. Quite apart from the political/financial conundrum the US stock market looks very over valued while the European markets look correctly priced if not slightly undervalued. Clearly that suggests that the EU should attract investors and investment further improving the economy over the next few years.
Looking around the world there is concern that China could experience problems but the consensus there is that they will be able to manage their economy and prevent a crisis over the medium term. The rest of Asia and Japan are growing at a satisfactory rate looking positive over the medium term as well. The only problems are Russia and the Middle East but that does not seem to have much impact on the positive outlook many people are projecting.
Therefore, despite the negative predictions for Brexit and a Trump win, the economies of the UK, Europe and America refuse to stop growing and the economists are now adjusting their forecasts upwards. It seems there is a credibility divide between the political cohorts and the people who are firmly of the view that things are not bad at all so what are you moaning about.
People are reacting to the circumstances they see around them which is currently a thriving economic environment that they expect to continue. Would you believe it!!
That’s all for this week, more observations next week.