Stephanie Flanders: things are not going to plan

“Politics has not gone according to plan,” notes Stephanie Flanders of JP Morgan Asset Management. “Expectations for Donald Trump’s economic policies in the US are being revised down.” But on the upside, the global economy has not produced any nasty surprises so far in 2017. Indeed, it’s quite the opposite – in terms of economic growth, “almost everywhere is picking up speed at the same time”. Growth forecasts “for both the eurozone and emerging markets keep getting revised up” – a big improvement on recent years.

The UK, unfortunately, is an exception. “Higher inflation due to the weaker pound is now biting into real wages, which are falling again after nearly three years of positive growth.” Consumer confidence has also “faltered”, which raises “the prospect of a more significant economic slowdown in the second half of the year”. So far “UK household spending has held up”, but that’s partly due to consumers dipping into their savings. At least “corporate investment intentions have started to pick up”.

The outlook for interest rates is also uncertain. “Inflation and wages are not rising as fast as expected on either side of the Atlantic,” which could justify a slower pace of rate rises. However, “there is also, arguably, less need for monetary policy to remain so supportive”. Already, several members of the Bank of England’s Monetary Policy Committee have voted for higher rates, while various Fed policymakers have voiced “concerns about the level of US equity markets”. What investors need to decide now is “which is more important for asset markets: monetary policy or the underlying state of the recovery?”.