British businesses have grown at the fastest rate for more than two years in the three months to February, despite uncertainty about the UK’s prospects as it prepares to leave the European Union, the Confederation of British Industry (CBI) has said. And according to the Office for National Statistics, whilst construction has slipped into recession, manufacturing is enjoying its longest run of growth since records began. Chancellor Philip Hammond said in the Spring Statement that the predicted falling debt load as a percentage of GDP in the 2018-2019 fiscal year marked a “turning point in this nation’s recovery”. Markets are still predicting a near 65% likelihood of the Bank of England raising the base rate to 0.75% in May; however, there seems to be a growing impetus for this to come towards the last quarter of the year should inflationary pressures not push the BoE to hike rates to bring inflation under control. Recent figures showed that the consumer price index fell to 2.7% in February from 3% in January – UK inflation has slowed more than expected, but remains above the government’s 2% target.
A trade war is heating up as US President Donald Trump has imposed a unilateral 25% tariff on steel and 10% on aluminium imports. Given that trade is the biggest driver of prosperity, such a protectionist “America First” approach could be very detrimental to global growth and may not provide Trump with his desired outcome. The Organisation for Economic Co-operation and Development (OECD) said “Trade protectionism remains a key risk that would negatively affect confidence, investment and jobs”.
Figures released in March saw US non-farm payrolls post the best reading for 18 months; the figures from the Department of Labor eased investors’ fears that rising wages would force the Federal Reserve to raise interest rates higher than planned. Market expectation remains that US interest rates will continue to rise gradually over the coming year. Jerome Powell’s first opportunity to chair the US Federal Open Market Committee meeting resulted in an increase of the target range for the federal funds rate from 1.25%-1.5% to 1.5%-1.75%, which was in line with market expectation and is the first of three hikes anticipated for 2018.
European Central Bank president Mario Draghi has taken a further step towards ending its crisis-era stimulus measures, dropping an explicit commitment to buy more bonds and expand its quantitative easing programme if necessary. The European economy has continued to perform strongly and whilst the ECB did not signal any desire to end its monthly asset purchases before September, as currently planned, Draghi indicated that the ECB will raise interest rates after its extraordinary stimulus measures end. A commitment to slow and cautious rises could set the path of ECB policy beyond the end of Mr Draghi’s term.
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