DIY Investor Magazine
/
Jan 2017
19
In the UK there are concerns that political uncertainty
and inflationary pressures will dampen economic
growth. Consumers, which are the driving force of the
economy, will see the tailwind of low inflation removed
over the next 12 months as a weak pound and rising fuel
costs increase prices.
Furthermore, as individuals and business see greater
uncertainty in the future, there will be a tendency
to hoard more cash, decreasing investment and
consumption. This is already beginning to be seen.
Oil
Last year saw a historic agreement made by
Organisation of Petroleum Exporting Countries (OPEC)
along with external countries to cut supplies and
support the oil price resulting in a 20% rise in prices. As
a result, the oil price is now trading over 100% higher
than the lows seen last January.
While the oil price is unlikely to rise significantly more,
the impact of the rise is yet to be felt. This will have a
significant effect on inflation across many developed
economies which have benefited from a falling oil price
for over two years. However, investors are now watching
to ensure that members adhere to the terms of the
agreement.
Any sign of foul play will result in a sharp fall in the price
of oil.
China
The most significant potential risk for 2017 comes from
China. There were concerns at the beginning of 2016
that the Chinese investment and export driven model
had run out of steam and the economy was becoming
swamped by bad debt.
This problem has not gone away and has only been
overshadowed by current events.
While the Chinese authorities have vast powers to
control the economy, the relative size of the government
now means that currency flows as well as the stock and
property markets are ever more market driven. While a
plan is underway to rebalance the economy towards a
more consumption and service driven model, there are
risks of an economic shock.
Given that China now makes up over 15% of global GDP
and a larger proportion of global trade, any domestic
issues would ripple around the world.
We enter 2017 with equity markets around the world
reaching record highs and bond market yields not far off
historic lows.
