The 2016 Effect

29th November 2016
P2P, Peer to Peer Lending

2016, what a year it’s been so far. The world lost Bowie, Alan Rickman and Prince at first.[1] Then as the year has moved on, Britain has left the EU and Donald Trump has become the President of the United States, defying all expectations in the process.[2]

If there was a word to sum up 2016 in economics so far, it would probably be uncertain. As you’ll no doubt be aware, the economy isn’t a living, breathing entity. It’s merely a set of beliefs in an idea, a concept if you will.[3]

This concept however is completely open to outside interference such as social, political and environmental factors.[4] And with 2016 being the social and political year that it has been thus far, how have these events effected the world economy and what can we expect in the future?

Let’s take a look.


Brexit – what this means for investors

In the immediate aftermath of Brexit, everything was a bit up in the air, and some would argue that it still is.

Though the economy showed some level of defiance in the months following the referendum, as GDP growth remained a steady 0.5% despite predictions of 0.3%,[5] the pound still sits at a record low and it doesn’t seem to be budging any time soon.[6]


What this means for investors is that your money is simply worth less in the worldwide market. If you were saving to go on holiday or buy a foreign property, you could find the price has increased significantly.[7]


Bank of England Base Rate

In a bid to reduce the chances of Britain going into recession post-Brexit, The Bank of England cut the base rate of interest to 0.25% on August 4, the lowest it’s ever been.[8]

For borrowers, mortgages and purchases, the interest rate cut was designed to make it easier to spend and repay debt in order to prevent recession.


What this means for investors however, is that returns from savings accounts may be as low as 0.25%. So, if you invest £1000, you may only get £2.50 back on your investment per year. Not great for your rainy-day fund.

 

Inflation has increased

As with the reduction in the value of the pound, inflation has also risen with the prices of raw materials and imports increasing.[9]


What this means for investors is that your purchasing power with your savings will be less than it was previously. That is, if the savings product you’ve invested in has rates of return lower than the rate of inflation. In order to protect your investment from returning a negative interest rate, you may wish to invest in savings products where the return is equal to, or greater than, the rate of inflation in future.[10]


Uncertainty in the market

On October 11, 2016, a memo leaked to The Times highlighted the speculated fears of many – that the UK Government has no plan for Brexit and industry is kicking off big time.[11]

As previously discussed, uncertainty in the market is one of the key elements which may result in recession. A government without a plan is not one that promotes solidity for outside investors. So, in order to counteract this, the UK Government needs to make a decision as to what it’s doing soon before foreign investment shies away.


The French Elections

Brexit isn’t just affecting the British Isles. The tide of unrest within Europe is now spreading across the EU which is seemingly leaning increasingly more to the right.[12] Marine Le Pen, of the French National Front, has been voicing a sharp anti-EU stance in the lead up to the 2017 French Elections and looks poised to make some form of bid for a ‘Frexit’ if the party gets any grasp of power. Though the French ‘Frexiteers’, have been basing their stance mainly on immigration rather than clouding their politics in economics. If the French were to leave, the chances of other nations such as Italy and Austria following suit could increase substantially. The effect that this would have on the economy as a whole would be massive. How each former EU country would negotiate trade within the EU, and the rest of the world, would obviously have a knock-on effect on the world economy. [13]

That said, until anything happens it would be impossible to say and inappropriate to speculate.

                   

The U.S. Elections

In case you’ve had your head in the sand for the past month or so, Donald Trump is now the Leader of The Free World. It’s hard to concede, isn’t it? The American Alan Sugar being President, Commander-in-Chief of one of the world’s largest nuclear arsenals.[14]

That said, Trump has promised to return jobs to the American people, cancel trade agreements that he says have hurt the American economy and even help pro-Brexiter Nigel Farage[15] to ensure that Britains Brexit actually goes ahead. That said, he’s also changed his mind back and forth on just about every policy which he’s suggested, which isn’t exactly great for faith in the market.[16]


What he wants to do

Trump’s stance on immigration may cost him more than the minority vote. Not least will mass deportations cost a lot of money but loss of work force could have a huge impact on the economy also. Edwards and Ortega forecast that if all undocumented workers (of which there are about eight million) were deported as Trump desires, U.S agricultural production will decline by 9% and construction and leisure and hospitality by 8% over the long term. As for manufacturing, it’s estimated that the decline could cost $74 billion.[17]

And whether Trump can actually reimburse the middle-American working classes of their jobs as he’s promised is also up for debate. If he does manage to close the $540 billion trade gap, he could potentially increase the economic growth of the country. And, with all these free jobs due to deportation, Trump’s long-term goal would no doubt be to reemploy middle-America. Whether he can actually do any this however, is up for debate as some economists are unsure if closing trade deals will actually have an overall effect on jobs in the first place.[18]


What’s happened so far?

As previously discussed, the first big issue is uncertainty. The U.S markets opened to a drop on the immediate days after the election[19] and mortgage rates shot up to 4%[20] showing that, at least in the immediacy, the stock market wasn’t that keen on Donald J. Trump being President.

In the week following the election however, interest rates shot to an all-time high, a move that’s largely seen to be a direct response to Trump’s much hyped deregulation of the stock market.[21][22]

This means that for investors in stocks and shares, at least at the moment, is that the forecast is rather good. That said, with bond rates dropping to the lowest ever, if you’re an American saver with your money sat in a bond, things aren’t looking great and sadly, the same goes for mortgage repayments.[23]


What does the future hold?

Perhaps the biggest potential setbacks to the U.S economy, sit with Trump’s somewhat ambitious plans to tackle immigration and increase defence. With a campaign based, arguably largely on fear, Trump’s big plans to Make America Great Again, including the Mexican Wall, the attempts to defeat ISIS and even the reduction of taxes for the super-rich, could put undue pressure on the working classes which Donald is allegedly trying to help.[24]

It’s argued that the Rust Belt States that voted Trump most likely did so as a direct stab against Hilary Clinton, the wife of the President who set up many of the trade deals that caused factory jobs to leave the US in the first place.[25] That said, with the US now using advanced manufacturing techniques that require highly educated middle-class workers, it’s disputed as to whether Trump will be able to bring back the working-class jobs that he stated he could.[26]

And despite the stock market and DOW being at a record high a week following the election, savings bonds have dropped significantly with the knock-on effect said be leaving the country staring down the barrel of a gun at inflation. The end result of which may be an increase in credit card rates, loan repayment rates and, as previously highlighted, could send the mortgage markets past the 4% barrier.[27]


What this means for investors thus far is pretty unclear. As with Brexit, it really is far too early to tell exactly what’s going to happen long term for Trump’s America. Most of the country’s continued prosperity lies in whether he can actually bring jobs back to the American people or not, something that is hotly debated by economists.[28]

One of the principles of a successful market is faith in the economic and political prosperity of the country, or set of countries that are involved. And with Europe, nay, the world in such a state of uncertainty, it’s nigh impossible to predict just what may happen over the coming months or years.[29]   


Watch this space.









[1] http://www.mirror.co.uk/3am/celebrity-news/celebrity-deaths-2016-famous-faces-7797848

[2] http://www.onthisday.com/events/date/2016

[3] https://en.wikipedia.org/wiki/Economy

[4] http://www.economicsdiscussion.net/economic-growth/5-factors-that-affect-the-economic-growth-of-a-country/4199

[5] http://www.professionaladviser.com/professional-adviser/news/2478468/uk-gdp-growth-confirmed-at-05-for-q3

[6] https://www.poundsterlinglive.com/eur/5738-gbp-to-eur-forecast-to-1-20

[7] https://www.poundsterlinglive.com/eur/5738-gbp-to-eur-forecast-to-1-20

[8] http://www.bbc.co.uk/news/business-36976528

[9] http://www.bbc.co.uk/news/business-36956418

[10] http://www.investopedia.com/ask/answers/156.asp

[11] http://www.thetimes.co.uk/edition/news/cabinet-split-threatens-to-derail-may-s-brexit-talks-hxfwmv2td

[12] http://www.independent.co.uk/news/world/europe/german-philosopher-jurgen-habermas-right-wing-populist-parties-grow-eu-integrates-brexit-a7132936.html

[13] http://fortune.com/2016/08/24/austria-italy-france-eu-exit/

[14] http://www.icanw.org/the-facts/nuclear-arsenals/

[15] http://www.telegraph.co.uk/news/2016/11/14/exclusive-donald-trumps-new-chief-strategist-steve-bannon-will-c/

[16] http://www.nbcnews.com/politics/2016-election/full-list-donald-trump-s-rapidly-changing-policy-positions-n547801

[17] http://www.chicagotribune.com/business/ct-trump-deportation-plans-could-undermine-economy-20161115-story.html

[18] http://www.pbs.org/newshour/making-sense/trump-says-hell-bring-jobs-back-to-america-economists-are-skeptical/

[19] http://www.economist.com/blogs/freeexchange/2016/11/global-economy

[20] http://www.cnbc.com/2016/11/14/trump-effect-pushes-mortgage-rates-to-4.html

[21] http://komonews.com/news/nation-world/markets-rally-behind-trump-victory-on-promise-of-deregulation-and-new-stimulus

[22] http://www.cnbc.com/2016/11/14/donald-trump-blew-up-the-bond-market-and-changed-everyones-view-of-interest-rates.html

[23] http://www.cnbc.com/2016/11/14/donald-trump-blew-up-the-bond-market-and-changed-everyones-view-of-interest-rates.html

[24] http://www.economist.com/blogs/freeexchange/2016/11/global-economy

[25] http://www.foxnews.com/politics/2016/09/26/trump-clinton-spar-about-trade-deals.html

[26] http://www.latimes.com/business/la-fi-trump-manufacturing-20161114-story.html

[27] http://theeconomiccollapseblog.com/archives/the-election-of-donald-trump-is-already-having-an-enormous-impact-on-the-economy

[28] http://www.usatoday.com/story/money/cars/2016/11/04/why-donald-trump-fail-bring-back-factory-jobs/93278546/

[29] https://www.bloomberg.com/view/articles/2016-10-05/markets-struggle-to-price-in-year-end-uncertainties

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