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Good Economic News -v- US Election Results

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As Harold Wilson once said, ‘a week is a long time in politics’. Just last week, the Bank of England (BoE) almost doubled its UK economic growth forecast for 2017 (to 1.4%), three months after reducing it substantially. It also seemed to scrap any thought of a further interest rate cut, in a U-turn on its earlier warnings that the economy would suffer a post-referendum downturn.

However, BoE Governor, Mark Carney, warned that inflation will take a real bite out of earnings as the CPI measure of inflation is expected to surge to 2.7% in 2017 and hit 2.8% in 2018 – which is higher than wage growth today. This means the Bank faces a balancing act between allowing inflation to rise over target (driving down real wages) and higher unemployment (which would happen if the Bank were to tighten monetary policy).

The upward revisions to economic growth in 2016 and 2017 seemed quite significant at the time. However, the election results from the US have thrown all of this back into the mixer. It’s likely that there will be considerable uncertainty in the US until well after the 45th President is sworn-in in January compounding the long-term uncertainty created by the Brexit vote. The chances of a US interest rise in December have reduced and the uncertainty over the world economy may mean the BoE revisits interest rates here.

Interestingly, Philip Hammond will be delivering his first Autumn Statement on 23 November. I suspect that the Treasury will be a very busy place between now and then running and rerunning its economic model based on lots of different scenarios. It seems likely that Mr Hammond will take a rather different view to tax and spending than his predecessor, but how much will his statement be influenced by events across the Atlantic?

William Harris – Director

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