April 27, 2017    4 minute read

This Feels Like a Financial Boom But Is It Really?

The Trump And Brexit Effect    April 27, 2017    4 minute read

This Feels Like a Financial Boom But Is It Really?

Many recent articles have suggested that we are in a financial boom following the closure of the FTSE100 and the Dow Jones at their all-time highs in early to mid-March.

Economists are indicating that UK and US stock market growth is only a small indicative measure of a boom, but additional boxes are being ticked which suggests that economic growth is set to continue.

A Positive Start to the Year

Both economies are running at near to full capacity. UK unemployment is at 4.7%, which is equal to its lowest since 1975. The US unemployment rate is also hovering at 4.7%, which is approximately half a percentage point above the peaks experienced prior to the financial crash in 2008 or the level of the boom of the late 1990’s.

The true debate among economists is to decipher how much spare capacity there really is, both in the UK and the US. Pressure gauges of demand are starting to appear, as we are witnessing price increases in both economies, with US consumer prices up 2.7% in March 2017 vs. March 2016 (the highest rate for five years), and UK consumer prices are nudging slightly above 2.0% comparatively.

The US Federal Reserve responded on Wednesday 15th March 2017 by taking the base rate from 0.75% to 1.0%, it’s third interest rate rise since the 2008 financial crash, and the second in three months.  The central bank has since commented that it is prepared to increase rates several times this year to keep a lid on inflation as it rises above its 2% target level.

Rates in the UK are yet to increase, but economists believe that if it were not for Brexit, the UK would also have had an increase in rates by now.

The Brexit and Trump effect

Following Brexit, UK firms began 2017 with a spring in their step, as Brexit fears dissipated and the strength of the economy reasserted itself, driving both business and consumer confidence. The chart below shows that financial services firms are beginning to recover their confidence, showing the first signs of positive optimism in over a year.

Following Brexit, the pound has grown weaker and weaker and was down 16.0% on the US Dollar and down 12.0% since the Brexit vote, which has made Britain cheaper for foreign tourists (with 11% more tourists in January than in 2016). According to PayPal, international sales out of the UK have trebled after the June referendum, which have both created optimism among British businesses and consumers alike.

While in the US, since the inauguration of Donald Trump,  “people”, particularly traders and businesses, have been making decisions based on perceptions of how he may change the country’s direction. Higher infrastructural spending, lower tax rates and reduced regulations on banks have induced confidence, which led to the Dow Jones smashing 21,000, its all-time high.

(Source: Google)

How Long Can It Last?

Although we have seen a revival of the UK economy, after the announcement that the UK would be leaving the EU, many British consumers still believe that the UK economy will be worse off after Brexit, (29% of people to be exact).

The announcement of several major companies to move operations outside of Britain, the recent drop in house prices which has seen London house price growth fall below both Manchester and Birmingham. For the US, and for Trump, turbulent and unexpected times lie ahead. With all of Trump’s promises to “Make America Great Again” and bold statements initially sparking a boom in the first quarter of 2017. Is there a risk that monumental infrastructure spending could assist with pushing the national debt into the trillion? Is there a risk that pulling the US out of the Trans-Pacific Partnership will adversely impact US business with big Asian markets? What about tariffs on goods imported from Mexico, and a possible border adjustment tax?

We have already seen President Trump humiliated when Congress voted heavily against “Trumpcare”. Reports suggest that President Trump is receiving much oppression from opposing parties and Democratic members with regards to a number of his proposed policies and therefore has 2017 already seen the US’ largest “boom”?

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