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Let them eat chaos – 2017 economic predictions

What can we expect from the year ahead? Jeremy Cook, from World First, gives his 2017 economic predictions as part of an exclusive two-part series.
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The last year has been anything but dull, and as the world continues to deal with the fall out of the major events of this year from the UK’s vote to leave the EU and the election of Donald Trump, 2017 is also shaping up to be pretty momentous. If 2016 is anything to go by, then I predict a riot with my 2017 economic predictions.

As far as 2017 economic predictions go, there are on three assets in particular that in my mind will be heavily impacted by political risk and macro events; the euro, sterling and wider emerging market currencies.

For these three, it could be a truly chaotic year. In this piece, I look at what is likely to affect the pound and why UK businesses need to start taking currency risk a lot more seriously.

Brexit begins in earnest

For all the heat and noise from the referendum and the near six months that has passed since that morning in June, there are few things that I are more certain of than when the UK went to the ballot box. I know that Article 50 will be invoked by the end of Q1 – in all likelihood and that will start the stopwatch on two years of negotiations.

Everything else is up for debate and, more pertinently, negotiation.

The UK economy has remained positive against many predictions but economic data remains balanced on a knife edge. Heading into 2017, it is inflation that worries us the most.

Inflation will likely be the main indicator of any damage from the EU referendum vote, the triggering of Article 50 and the eventual separation of the UK from the EU – and I believe that that pain will be held off until next year.

In my estimates, it will be the early part of the New Year that sees the majority of the price rises. Retailers have held off on price rises into Christmas but that will end soon. Of course, the tightness of budgets in the retail environment means that any price rises are going to be painful – and low cost operators and discounters will be ready to pounce – but they will have to come or I will likely see additional seasonal and structural unemployment increases in 2017. Even so, I cannot rule out an increase in unemployment through the year.

Growth will remain weak, while investment will remain stilted.

2017 economic predictions: Another leg for sterling?

Is sterling oversold? Absolutely. Does that mean that it cannot go any lower? Absolutely not. While the pound has only been weaker on a trade-weighted basis twice since the end of Bretton Woods, the nature of Brexit and its existential risk to the UK’s position in the world and its trading relationships across the globe arguably make for a more complicated policy cocktail than anything I have seen before.

Whilst I am slightly more optimistic about sterling in my 2017 economic predictions, any upward move will be largely depend on an easy path of negotiations between the UK and the EU. Markets will be waiting expectantly for Theresa May and co to lay down their Brexit strategy before making too much of a move on GBP.

I find it unlikely that the Bank of England will make any changes in policy to support the pound. Whilst inflation may run above target, governor Carney at the most recent inflation report made it clear that the Bank of England was very much in a neutral stance and indicated that the likelihood of cutting interest rates further was low.

Within his statement, Carney emphasised the hard trade-off the Bank of England faces – higher inflation or fewer jobs. There is not much the Bank can really do right here, as predictions will be picked over by either side of the referendum divide and with policy at record lows and its credibility being unfairly dragged through the streets, the Bank of England will sit on its hands and wait for the data to show it something more than higher inflation and lower growth.

The one bright spot for sterling may be its ability to keep its head above water against the euro given the political issues on the continent. Sterling has been used as a haven of late from issues within European politics.

What is the risk for your business?

When we surveyed SMEs in October, nearly 40 per cent were worried about the impact currency volatility had on their business. And with the rough ride the pound had in 2016, this is no surprise. Importers in particular have been hit hard by a weak pound and cost-push inflation means, the consumer is likely to be hit in 2016. That is why any business with exposure to international currencies, whether it is paying suppliers overseas or selling goods internationally, needs to play an active role in managing currency. Speak to a broker now and make sure managing your currency risk is at the forefront of your mind.

Jeremy Cook is chief economist at World First.

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