January ended pretty much as it began, with stocks around the globe trading higher while the US dollar continued its downward trend. But what has started to emerge is an unexpected change in the direction of some important economic indicators.
Here in the UK, economic growth of 0.5 per cent for the last three months of 2017 positively surprised forecasters. It took the annual rate of growth to 1.8 per cent, only marginally below the 1.9 per cent of 2016, albeit still the slowest growth since 2012.
Although growth is arguably still at a snail's pace, it is encouraging to note the expansion in the services and manufacturing sectors, despite flagging consumer demand and some disappointing Christmas results from retailers.
Average wage increases of 2.5 per cent were seen by some as pressure for the Bank of England to raise interest rates further, when in reality, after inflation the increase amounted to a 0.5 per cent loss in purchasing power for UK consumers. In the US, it was the other way around. GDP growth for the final quarter of 2017 was a disappointing annualised 2.3 per cent, considerably lower than the 3 per cent President Trump had envisaged.
The other surprise came once again from US politics, from the conciliatory tone Trump and his representatives adopted at this year’s World Economic Forum in Davos. This was later echoed by Trump's state of the union address to Congress.
Global leaders at Davos were braced for confrontation, but instead Trump and his entourage turned away from hostility to spread a benign sales message. “America first does not mean America alone” was the mantra, claiming the US as the best place in the world to do business and invest.
Despite some whistling, booing and laughter, Trump’s message fell on welcoming ears. It seems the global business community is willing to ‘play the ball, not the man’, by setting aside the barrage of unpresidential behaviour from Trump himself and focusing on his business-friendly reform programme instead.
The UK economy: Warts and all
The UK economy did worse than its global competitors in 2017. As of the end of the year, real growth had slowed to 1.8 per cent, while growth across the rest of the western world accelerated. Consensus estimates (according to Factset) for 2017 full-year data have the UK growing at 1.2 per cent, Japan 1.5 per cent, US 2.5 per cent and Germany 2.6 per cent.
Some might point to Brexit politics as a reason. Although it may have had some impact, the underlying fragility of the debt-laden UK consumer was always going to be exposed, regardless of the referendum result. Even without the extra shove down the hill from Brexit, sterling would have been likely to weaken.
But is there room for optimism? Well, British-based production is seeing unprecedented demand, partly because of sterling’s weakness in 2016, and partly because UK workers appear to be more productive. Given the stability of sterling over 2017, inflation pressures should dissipate fairly soon – probably to less than 2 per cent by the end of 2018, although the mild upswing in global prices may keep it from falling too much.
The Bank of England should be able to maintain low rates for a long time amid slow-ish domestic demand. It may intervene should personal borrowing rise dramatically, but recent events make a rise in household credit unlikely. It too will be hoping the housing market stays in good order.
The seeds of the current slowdown in domestic demand were there before the referendum, and so current political manoeuvring may be less important than headlines would suggest. The truth is we shouldn’t expect outperformance from the UK as a nation, nor from the bulk of our domestically focused companies. We will have to be reliant on the demand strength of others rather than being a driver of their production.
Cryptocurrencies: More cryptic than currency
The meteoric rise of Bitcoin at the tail-end of 2017 has provoked some interesting discussions about the concept of money and its functions.
Bitcoin emerged as a libertarian response to central and government control of money, and the alleged shortcomings of the traditional banking and reserve system. It is not a 'fiat' currency, a ‘let it be done’ currency a government has declared to be legal tender, but not based in the value or quantity of a physical commodity, like gold or silver. But nor is it a commodity-backed form of currency either.
Instead, it’s a virtual currency, created and stored digitally. No single authority controls its production, supply or value. Moreover, Bitcoins are not printed like pounds or dollars. They are ‘mined’ through computer software.
In essence, money is a ‘medium of exchange’, which means it can be accepted as payment for goods or to settle a debt. But it also functions as a ‘unit for account’, enabling price levels to be determined and accounts to be maintained and represents an effective store of value. For a currency to successfully fulfil these functions, its purchasing power must be relatively stable, or at least predictable over time.
Unfortunately, cryptocurrencies like Bitcoin completely fail to achieve these basic requirements. The value of a cryptocurrency is derived solely from the value that people and markets assign to it. The US dollar value of a Bitcoin is determined on an open market, entirely based on how much (or how little) holders of traditional currency desire to hold it.
Since Bitcoin, other cryptocurrencies have emerged, including Ethereum, Ripple, Litecoin and Dash. What cryptocurrencies all have in common is the Blockchain technology developed for their account-keeping, in the form of highly transparent, decentralised digital ledgers.
Blockchain represents the most tangible value of the entire cryptocurrency movement, because its advantages can be applied to any transaction recording, from monetary (including traditional currencies), intellectual property rights (copyright management), personal data (social security numbers) or real assets (land registries).
But due to its open code nature, holders of cryptocurrencies do not get to acquire a stake in this potentially hugely valuable technology. Which is somewhat ironic.