Beaufort Analysis No. 299 – Deal or No Deal
In the UK, consumer confidence fell due to fears of a Brexit ‘no deal’ and the outlook for personal finances weakened which could indicate a slowdown in consumer spending in the lead up to the Brexit deadline, now only six months away. If the UK and EU were unable to reach a withdrawal agreement, there would be no 21-month transition period, which Theresa May is proposing, leading to consumers and businesses having to respond immediately to EU changes. Trade could suffer from increased tariffs resulting in higher prices for goods and delays at borders from heightened security checks. The legal status of EU workers in the UK, as well as Britons working in EU countries, would be unclear. Mark Carney, governor of the Bank of England, has also warned that house prices could fall by a third over three years leaving homeowners with negative equity and spiraling mortgage rates.
It was also announced last week, by the Office for National Statistics, that the UK economy grew by just 0.4% during the April to June quarter, bringing a revision to the annual growth rate of 1.2%. Exports tumbled and business investment slumped in the quarter in the latest sign the economy is failing to rebalance. Economic growth for the first half of 2018 was the weakest since 2011 and sterling fell on the news, giving back some of its recovery against the US dollar.
Last Wednesday, as widely expected, the US Federal Reserve raised interest rates by 25 basis points for the third time this year, bringing the federal funds rate to a target range of 2% to 2.25%. The move reflected an upbeat assessment by chair, Jerome Powell, who said this “gradual return to normal is helping to sustain this strong economy.” The federal funds rate is now at its highest since October 2008, just after the collapse of Lehman Brothers. Yet although the Committee voted unanimously for the rate increase, President Trump is not making their decision easy as the trade war threatens both to slow growth and boost inflation. It was suggested that the Fed will raise rates a further three times next year and once in 2020, to reach a level of around 3.4%.
Finally, the price of oil has risen 45% over the last twelve months and Brent Crude has eased past $80 a barrel for the first time in four years, notably caused by Iran’s recent drop in output due to US sanctions. A meeting in Algiers last weekend between Opec and non-Opec members, resulted in the decision to maintain the level of production due to current demand, despite calls from President Trump to increase it in order to lower prices.