High UK employment masks troubled economy

12 March 2019 Consultancy.uk

With mounting geo-political tensions and slowing economic growth, the global market has seen a long period of stability come to an abrupt end over the last 12 months. Despite this, a recession remains unlikely, according to a new study, as unemployment stands at pre-crisis lows in many developed countries, while inflation remains at a manageable level.

The global economy at present seems poised on a knife’s edge. With Germany having only narrowly avoided slipping into a recession at the start of the year, while the US and China continue to trade blows in the prelude to what many anticipate could be a devastating trade war, the world’s leading economies could be on the brink of major downturns. That’s before even taking the complex mess of Brexit negotiations into account. Yet in spite of all this, some industry experts are still anticipating calmer heads to prevail, and as a result are predicting a relatively uneventful 2019.

According to a new forecast from international HR consultancy Mercer, this year will see modest economic growth, as well as modest growth in equities. While inflation is predicted to rise slightly in the US and other leading markets, growth will be boosted by demand from developing markets. It is worth noting that the ‘Economic and Market Outlook 2019 Report’ is based on data from October 2018, and thus does not take into account the aforementioned downturn in Germany, or the most recent developments from Brexit.Tights labour market to push up wagesOver the last year, growth was considerably weaker than 2017, as various geo-political uncertainties made themselves felt. Despite this, the US enjoyed a strong year, with high GDP growth and jobs added. Europe also benefitted from continued labour market growth, on the back of relatively stable economic growth in 2018. While UK growth was slow, its figures were likewise boosted by its highest levels of employment since 1975. This led to a global unemployment rate of 8.1%, only slightly down on the pre-crisis level of 7.3% – with Germany and other Western European countries noted for full employment.

However, the rise of employment does not necessarily constitute a guaranteed boom in any market. As exemplified by the UK, a lower unemployment rate has not translated to a noticeable improvement in consumer power. Two-thirds of the UK’s jobs boom has also come from growth in atypical work, including self-employment, work on zero-hours contracts and agency work, which often see workers fall below the bread-line. As a result, despite the record number of consumers there theoretically are, Britain’s retail and casual dining sectors were decimated by falling spending last year.

Developing and developed market equity returns

At the same time, the UK’s business investment has been weak. Corporate spending in the UK has fallen over four consecutive quarters for the first time since the last recession, as businesses tighten their belts before Brexit hits at the end of March. Investing in new technology or equipment in a market businesses may wish to exit could be difficult to reverse, but compared to their continental counterparts, British workers are easy to lay off, should things sour. Higher employment in the UK could well be a prelude to a turbulent 2019, in that case, rather than a statement of confidence in the economy.

At the same time, there are indicators that the global economy could be stung by its growing reliance on China as a creditor. The Asian superpower saw its slowest growth in more than 30 years – although still well above 6% – and if this trend were to continue it could have major repercussions. Meanwhile, the US market’s knee-jerk reaction to high employment, to inflate prices, could also see the world’s largest economy see declining consumer power stifle its own economic progress.

Equities

In terms of the equities market, 2018 saw significant ups and downs, with the end of year seeing a sharp sell-off of tech stocks in particular. The year as a whole was fairly stagnant, and even though the start of 2019 has seen a bounce back, the market is likely to remain uncertain going forward, with geopolitical concerns, as well as high valuations and reduced cheap funds, weighing on investors.Higher inflation, rates and yieldsGoing forward, Mercer believes equities may rise on the back of global economic growth. US equities could be in for rougher weather, with the firm noting that, as of October last year, they were relatively overpriced. Going forward the firm suggests that the coming five years will net lower returns than had an investor entered the market five years ago. This in part reflects the height of the current market rather than large scale impacts on future equity growth, according to the firm.

Bonds are likely to generate higher yield going forward, reflecting the increase in central bank interest rates across developed markets. Eurozone government bonds and Japanese central bank bonds were relatively flat in 2018, with neither moving on rates hikes. US bonds, however, saw upward momentum to around 3% as the Federal Reserve increased rates, while UK government bonds too rose on the interest rate hikes. However, long-term US bonds remained relatively flat throughout 2018.

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