DESPITE fears of economic turmoil following the Brexit vote and the election of Donald Trump as US president, 2016 ended on a relatively positive economic note, but what lies ahead for consumers in 2017?
At the end of last year, consumer confidence was up slightly, according to the GfK Consumer Confidence Index, indicating people remain relatively confident about their personal finances. This was supported by the Bank of England’s 2016 economic snapshot, which revealed that bank lending and consumer spending both rose towards the end of the year.
Yet there could be clouds on the horizon. Prime Minister Theresa May is set to trigger Article 50 by the end of March, at which point the Brexit talks and negotiations can begin in earnest. Meanwhile, new president Donald Trump looks set to make some big changes, while inflation is expected to rise here in the UK. Overall experts are warning that this year will be a tougher year economically.
Trump
So far the markets have reacted positively to Trump’s election, viewing him as pro-business. In the four weeks after his victory the Dow Jones index rose more than 1,200 points, on the back of Trump’s promises to invest in infrastructure, cut taxes and ease regulations.
However David Hotton, Handelsbanken’s Head of Treasury, believes the markets are currently “over optimistic’, having failed to price in the potential negatives of his presidency, including a possible trade war with China and the stronger dollar.
He says: “Trump will be determined to get his signature policies through to make his mark. He is likely to jettison the Transatlantic Trade and Investment Partnership (TTIP), which could be good for some parts of the US domestic economy but less so for big companies and other markets globally.
“He will almost certainly raise trade barriers for China and Mexico, roll back Obamacare, and reduce immigration, which is not good for economic growth. However, his pledge to reduce regulation is good news for banks and the financial and energy sectors in particular.”
Inflation
Inflation rose to 1.2 per cent in November, according to figures from the Office for National Statistics (ONS), below the UK government’s stated target of two per cent. However, it is expected to rise sharply this year, fuelled in part by the weaker pound, which will continue to push up costs of imported goods for both consumers and businesses.
Oil prices are also rising following a long period of record low prices, and this will also be felt by households and businesses.
In November 2016, the Bank of England forecast that inflation would reach 2.7 per cent this year, adding that it did not expect inflation to return to the target of two per cent before 2020.
House prices
While house prices are still continuing to pace upwards across much of the UK, the rate of house price growth has begun to ease slightly, according to the ONS. The average price of a UK home rose 6.9 per cent in the year to October 2016, to reach £217,000. However, this was unchanged from September last year. Meanwhile transactions fell seven per cent between November 2015 and November 2016.
Many believe the slowdown is the result of post-Brexit vote unease, which may intensify once negotiations with the EU begin in earnest. Despite this, a nationwide fall in prices seems unlikely due to the continued imbalance between supply and demand across much of the UK.
Interest rates
If there is strong economic growth then interest rates could rise from their record low of 0.25 per cent. However, ongoing concerns surrounding Brexit could mean the Bank of England leaves rates at their current level for a while.
Yet if the U.S sees stronger growth then it is likely to lead to growth in the UK, which in turn could see rates in the UK begin to rise. A policy move back up to 0.5 per cent by the Bank of England is therefore not inconceivable.