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What have we been up to


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Is Davos still relevant?

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It was a week in which Davos dominated, yet we seem to have little to show for our world leaders’ week-long sojourn in the Swiss Alps. One might question the relevance of the annual Word Economic Forum when the increasing importance of blockchain is one of the main talking points from the summit. Surely the irony cannot be lost on the attendees.
Perhaps more interesting last week was the slew of growth updates from both sides of the Atlantic. Soft data from Europe was particularly punchy, with the influential German ZEW Economic Sentiment survey continuing to edge higher, consumer confidence in the eurozone nearing the top of its long-term range, and PMIs remaining so consistently elevated that many are beginning to doubt their relevance as a leading indicator.
Performance in the US wasn’t too far behind. Thursday’s 2.6% GDP print for Q4 growth (annually) was below market expectations of a 3% number, but no one can be too disappointed. Previous figures were flattered by one-offs including hurricanes Harvey, Maria, and Irma, which boosted Q3 at the expense of Q4 through their effects on inventories and net exports. More importantly, the Trump stimulus seems to be finally bearing fruit, with 2.3% growth for 2017 as a whole (bettering 2016’s 1.5%) and the gradual increase in underlying US economic momentum. Positive durable goods numbers last Friday underlined this, confirming that both businesses and consumers feel that the economy is improving and are willing to spend accordingly.
Both will be music to the Fed’s ears as its Federal Open Market Committee looks likely to continue normalising policy over the course of 2018.
However, there is perhaps less cause for a pat on the back for UK policymakers. No doubt there have been several (very) bright spots to the UK economy since the Brexit referendum. Manufacturing continues to go from strength to strength, residential construction continues to benefit from the Government’s housebuilding agenda, and much of the dominant services sector continues to deliver growth for UK plc.
But the headline numbers don’t lie.
Better-than-expected growth in Q4 of 1.5% (vs. 1.4% consensus) does not read particularly well in the current context, and puts the UK quite far down the G7 in terms of economic momentum. Year-on-year GDP growth falls almost 2% short of Canada’s 3.4%; far from our peer-topping position at the end of 2016. Growth in the eurozone has also outstripped the UK since March of last year, and the UK might reasonably claim the title of the Sick Man of Europe in present company.
Whether this will have any real bearing on the UK’s negotiating position against an emboldened eurozone is more of a nuanced question, although we can only imagine that it made Theresa May’s recent trip to Davos just that little bit more uncomfortable. Continued underperformance will no doubt weaken her hand.
Upcoming economic releases

Carrying on the theme of growth, we can expect to see an update for the eurozone as a whole on Tuesday as well a country-level update from Spain. Aggregate figures are expected to be up 2.7% year-on-year, representing an increase on 2.6% in Q3. We can also expect fresh figures on consumer confidence and business sentiment from the European Commission – which will no doubt predict further GDP gains ahead.
Central Bank watchers will keep a keen eye on Mark Carney’s speech to the Lord’s Economic Affairs Committee on Tuesday. This will be the last chance for the Bank of England’s Governor to opine on his view of the economic outlook, and drop any hints ahead of the MPC’s next policy meeting on the 8 February.
Eurozone inflation and unemployment, and US home sales, should keep markets busy on Wednesday, while PMIs and nonfarms will round out the week on Thursday and Friday.


All views expressed here are the Author’s own and are based on information available at the time of writing


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Richard Conway

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