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Five things to look out for this week in world economics

Before Britons become too excited about the faster performance of the UK, they should note that the Eurozone has picked up some pace too

Hamish McRae
Sunday 29 January 2017 12:24 GMT
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Crowds celebrate Chinese New Year, beginning the year of the fire rooster
Crowds celebrate Chinese New Year, beginning the year of the fire rooster

After the cascade of new information and surprise last week this will be a week of contemplation and digestion. What really matters and what is just noise?

And the first thing that the world of finance and economics has to figure out is what has really changed in the relationship between the US and UK following the meeting of Donald Trump and Theresa May? There is the basis for a trade deal that might, in the medium term, help refocus UK economic relations away from dependence on the European market and towards the rest of the world. But that was happening anyway. In showbiz terms it matters because it will reinforce the growing majority of people in the UK who believe that Brexit was a good decision: crudely, that Americans support us, whereas Europeans want to punish us. But in hard economic terms not much changes. Let’s reflect on that.

The second thing is more mundane: clues about how fast global interest rates will climb. There are policy meetings of the Federal Reserve on Wednesday and the Bank of England on Thursday. While there will be no changes on rates (if there were that would be a huge surprise) we should listen to what is said. The issues are when the next rise in US rates will come and whether there is likely to be a rise in UK rates later this year.

As far as the UK is concerned there is also the quarterly Inflation Report. Expect growth for this year to be revised up further, as the drag from Brexit seems even less than expected when the previous report was published in November. But the big test – how the economy responds after the triggering of Article 50 – is yet to come.

Note, however, that European growth is also likely to have ended last year on a strong note, with figures on Tuesday suggesting the Eurozone grew at 0.5 per cent in the fourth quarter. That would bring Eurozone growth to 1.7 per cent for the year as a whole, slower than the UK but not bad compared with the post-financial crisis outcome. Before Britons become too chippy about the faster performance of the UK, they should note that the Eurozone has picked up some pace too.

The final thing is more random. This is the first week of the Chinese New Year, the year of the fire rooster. In any rational sense it is meaningless of course. But it is worth remembering that a year ago there were dire warnings of a forthcoming collapse in the Chinese economy, warnings so severe that there was a slump in US, UK and European share prices. Anyone who bought into equities a year ago is well up – even up in the UK markets notwithstanding the sharp fall in sterling.

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Now the mood is quite the reverse, with all markets at or close to highs, and with the US markets exceptionally strong. As it turned out, the Chinese economy cantered on at a brisk 7 per cent or thereabouts, and the massive political surprises in the UK and US have been absorbed without, as yet, any damage to their economies. So the thought is this: will this Chinese year see a negative surprise there?

There is one glaringly obvious candidate: a fight with the US over its huge trade surplus with America. China sells to the US roughly four times as much as it buys from them. The new President has promised to do something about this but we don’t know what. There are obvious difficulties: for example, Apple assembles its iPhones in China. Does the US Administration really want to force it to bring production back home? We have had a flurry of activity on trade from President Trump already. Look for signals about US policy to China this week. We won’t have much of a clue about the likely impact on the Chinese economy for months, but whereas a trade war between the US and Mexico is a bit of a side issue for the rest of the world, one between the US and China matters big time.

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