Investment newsletter - June 2017

Page 1

Investment Newsletter June 2017

Lacking Confidence?

Mike Deverell Investment Manager

Until recently the UK economy has been doing very well, defying some of the more pessimistic projections around the time of the EU referendum.

Chart 1 shows CPI inflation (orange line) over the past decade compared to wage inflation (grey line). The shaded area is the difference between the two.

However, one of our concerns has been that the sharp fall in the pound over the past 12 months would translate into higher prices in our shops. This could then have a knock-on effect on the economy as people spend more of their earnings on the essentials, leaving little for discretionary spending.

From the financial crisis in 2008 until 2014, real wage growth was negative. We then saw real earnings growth for the next two and a half years, before recently dipping back.

Some recent data releases underline this concern. Inflation figures released this week were higher than many had expected, with CPI at 2.9% and RPI at 3.7%. The following day, wage inflation figures were surprisingly poor, with growth falling to 2.1% including bonuses and 1.7% excluding bonuses. Wages are growing less than prices which means incomes are falling in real terms.

Whilst the economy has performed well over the past couple of years, this chart shows how fragile this can be. Wages have fallen in real terms for close to seven of the past ten years, so some people are substantially worse off in real terms than a decade ago. The consumer is one of the main drivers of economic growth. In fact, since the referendum the strength of the consumer has surprised a few people. Perhaps this was a reaction to the fall in sterling, with people

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Investment newsletter - June 2017 by Equilibrium Financial Planning LLP - Issuu