Michael Baxter's Predictions for 2018

For UK plc, 2017 was much worse than I expected. Post Brexit vote, the UK economy did rather well, slowing to 0.4 per cent expansion in Q3 2016

Article updated: 28 December 2017 10:00am Author: Michael Baxter

For UK plc, 2017 was much worse than I expected. Post Brexit vote, the UK economy did rather well, slowing to 0.4 per cent expansion in Q3 2016, but increasing to 0.6 per cent in Q4. The narrative emerged that Brexit’s impact on the UK economy was limited - Project Fear had been discredited.

Well, that narrative seemed to implode in 2017. UK plc grew by 0.3 per cent in Q1 and Q2 of 2017, and by 0.4 per cent in Q3. Evidence from the surveys point to a mild improvement in Q4, around 4.5 per cent.

This poor performance contrasts with economic growth elsewhere, the fact is that while the UK struggled, much of the euro area saw its best economic performance this decade.
It may be down to the economic cycle of course - the UK was one of the best performing economies in the advanced world in 2015 and 2016, maybe it was just its turn to slow. These things often average out in the long run.

Then again, there seems to be two main reasons why growth was weak in 2017 - the fall in sterling after the Brexit vote led to rising inflation, and then falling real wages.

Secondly, investment was weak, but showed signs of an improvement in Q3, expanding by 0.5 per cent quarter on quarter but just 1.7 per cent year on year.

2018 - my view

It is possible that in 2018, the UK will enjoy the flip side of the post Brexit fall in sterling - it all boils down to timing. When a currency falls, after a time-lag of a few months, inflation begins to rise, a year or so later, exports increase.

In 2018, inflation should fall, real wages begin to start rising by the end of the summer, and if the purchasing managers indexes are to be believed, exports will rise, giving exporters a boost.
The UK’s exporters should also benefit from the strength of the US economy and euro area.

Interest rates in the new year

I am not saying anything original in predicting rising interest rates, in the US and UK, and the end of QE in the euro area. But rates will rise because the economy is strong, I don’t expect any major fallout in 2018 – although some highly indebted emerging countries such as Turkey may take a hit. Canada is also vulnerable to rising rates worldwide.

Hard numbers

I guess I am going to have to commit myself - I forecast quarterly growth of 0.5 per cent in Q1 and Q2 next year, 0.6 per cent in Q3 and 0.5 per cent in Q4.

As for the markets - the idea that US stocks will carry on rising beggars belief, but then the US economy is strong, the giant techs seem unstoppable, I suspect that the S&P 500 will rise by around seven per cent this year, but the NASDAQ will do even better, up around 15 per cent.

I expect this to be a good year for stocks in the euro area, which will outperform the US markets.

The UK’s big problem is not enough techs. But I expect exporters to do well, but many are forecasting rises in the pound, if that is right, the FTSE 100 and 250 should take a hit, as many of the members of these indexes do much of their trading in overseas currencies.

But the prognosis for the global economy in 2018 is good, and that has to be good for the FTSE 100 and 250. I reckon both indexes will finish the year higher than right now.

 These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees.

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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