Tony Ward is chief executive of Clayton Euro Risk
As 2016 hands the economic baton to 2017, it’s the time of year in which pundits look back over their shoulders before making predictions on the year ahead. And I’m no different, in that respect – although trying to second-guess how things will pan out with Brexit and other uncertainties hanging over our heads is tricky, to say the least.
So what are we to make of 2016? Well, the FTSE 100 share index ended the year at a new high, up 22.57 points or 0.32% at 7,142.83. It rose 14.4% in 2016, outperforming European indexes by a considerable margin, so that’s good. But look carefully at what lies behind this and all may not be what it seems.
The FTSE 100’s rise is generally seen as a reflection of the fact that many export-orientated companies have been helped by a weakened sterling. Yet in the CFA’s latest quarterly valuations index, 71% of participants believe that equities in developed markets, including the UK, are overvalued. That compares with 40% at the beginning of the year.
Shares in London are at their most overvalued since 2012 and could be heading for a big sell-off as uncertainty about political upheaval and the global economy bites. Will Goodhart, chief executive of Chartered Financial Analyst unit, said that ‘2017 is looking like a year where investors should tread carefully’. Agreed.
And what to make of consumer sentiment?
Well, only recently this seemed to be riding high with spending habits largely unchanged despite Brexit.
However, a YouGov poll taken over December 18–19 found that confidence in the economy has dropped sharply amid signs that people are worrying about family finances in the year ahead. Only 11% of voters think their finances will improve over the coming year, down from 21% in December.
The poll, conducted for The Times, also found that 38% of voters think household finances will worsen – the most pessimistic figure since the election. The YouGov/Times survey revealed that only 22% of people think that the economy overall is performing well, down from 35% in 2015.
Until now, consumer confidence has held up strongly with the latest GDP figures finding continued growth in consumer-focused industries. However, the KPMG/Ipsos Retail think tank has predicted stagnating retail growth next year, with prices increasing by an average of 5–8%. Furthermore, forecasts for the UK economy are gloomy with some experts predicting the toughest year since 2009.
I hear warning bells ringing. Without doubt the next 12 months are going to be challenging.
Against this backdrop of anxiety and uncertainty, I’d like to offer my economic wish-list for 2017, which I hope might moderate some of these negative forces. Of course, my wishes are intertwined around Brexit and how we progress with our negotiations, as I believe this remains key to bolstering business and consumer confidence. Regular readers of my blog will recognise these wishes, so for the sake of brevity, here they are in concise bullet points:
1. Look after the City. Make sure it remains the world’s leading financial centre. Financial services were the biggest contributor to mitigating Britain’s trade deficit of nearly £40bn last year. The surplus recorded by the sector increased by £185m year-on-year to £63.4bn in 2015. The surplus has never been higher. At risk of repeating myself, let’s prioritise and protect our status as the ‘banker for Europe’. Put these interests at the heart of our negotiations.
2. Put in place a transition period early in Brexit talks to give the City and our businesses enough time to adapt to new working practices and regulations. Chancellor Philip Hammond and the Bank of England’s Mark Carney have already called for such a deal to smooth the UK’s departure from the EU, so why delay?
3. Go for soft, not hard Brexit. It really is in the country’s interests to do this. A hard Brexit, in which Britain would forgo full access to the EU’s single market and the customs union, was regarded as the biggest risk to corporate health, according to the Association of Business Recovery Professionals. Let’s not go there.
The good news is that British businesses are gearing up to embrace Brexit. That in itself is cause for celebration and most welcome.
Let’s do what we can to end this uncertainty and get on with 2017.