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  • Neil Williams
    In his latest Economic outlook, Neil Williams, Senior Economic Adviser to Hermes Investment Management, argues that Japan-style deflation is becoming an increasing possibility elsewhere.
  • Neil Williams
    Political risk is ‘trumping’ economics, with a confluence of factors such as populism...
  • Neil Williams
    In his Q4 Economic outlook, Neil Williams, Senior Economic Adviser to Hermes Investment Management, argues that even a decade after the fall of Lehman Brothers - central banks will be slow to lift a tide of liquidity still hiding the rocks beneath.
  • Neil Williams
    In his latest Quarterly Economic Outlook, Neil Williams, Senior Economic Adviser to Hermes Investment Management, argues that markets are still taking a ‘glass half full’ view of the macro outlook, with little real consideration of the new risk emerging. Until now, this has made sense, with speculation the US would open the fiscal box having justified ‘reflation trades’. However, while better for growth (see chart 1), markets are ignoring the darker cloud looming. Rather than financial distrust, we may need to brace for political distrust with the threat of beggar-thy neighbour policies - from the US to anti-European populism - rising. 2018 could be a ‘year of two halves’... In which case, 2018 could be a year of two halves, where stimulus- euphoria gradually gives way to stagflation concern. Helpfully, the trade-off is that policy rates stay lower than many expect. As chart 2 attests, the world’s appetite for international trade has, as a share of GDP, more than doubled in the past 50 years. Nevertheless, without care, the unhelpful jigsaw piece of retaliatory protectionism from the 1930s, might come crashing into place. In 1930, it was triggered by the Smoot-Hawley reforms that raised US tariffs to up to 20% on over 20,000 imported goods. This hit the US’s relatively small number of trading partners, most notably Canada and Europe, and prolonged the depression.
  • Neil Williams
    •While 2017 was again dominated by geopolitical risk, none of that was allowed to seep into financial markets. Reflation trades prevail. Yet, the frustration for central banks is that recoveries are failing to generate enough inflation to trigger their usual reaction functions. •If they truly want to get their ‘powder’ back, in terms of reclaiming policy rates while core inflation stays tame, the spirit, if not the letter, of the Fed’s dual mandate may make sense for others too. •While this may be deemed ‘hawkish’, it would be more than offset if we need to brace for more political distrust: with the threat of beggar-thy-neighbour policies - from the US to an upsurge of anti-European populism - a major risk still unpriced by markets. •Amid these forces, our macro outlook is based on five core beliefs. First, despite ‘muscle flexing’, the road to normalisation will be long & slow. Real rates will stay negative, with ‘peak’ rates ending up below what we’re used to. The question is how to drain the liquidity ‘sink’ without unintended consequences.
  • Neil Williams
    As the BoE raised rates for the first time in a decade the pound plunged and we saw the worst day for sterling since the post-Brexit plummet. Will sterling continue to struggle? And are there more rate hikes on the horizon? Neil Williams, Group Chief Economist at Hermes Investment Management, gives his take on the Bank of England Inflation Report and says the hike was a one-off muscle flex from the BoE giving them more powder to use in an economic slowdown.
  • Neil Williams
    •After 12 months in the departure lounge, our Brexit negotiations have started. Political fall-out has added an extra ‘speed bump’ on a journey likely to take way longer than the two years hoped for. •Mr Hammond’s more conciliatory tone is welcomed, but is inevitably clouded early on by ‘cherry picking’. Our negotiations could take years to potentially end up back close to square one, in terms of striking the free trade agreement that most parties want. •When the deal is struck it will need Parliamentary approval, & be subject to a ‘phasing in’ period. And this after sign-off by our 27 EU peers. Striking a US deal by the 2022 UK election needs talks to start now - well before Mr Trump’s 2018 ‘Mid-Terms’ campaign. •Which leaves the BoE watchful that a weaker pound doesn’t keep pumping inflation. The MPC could feasibly reverse its 25bp ‘safety net’ rate cut from last August. But, in the absence of a recovery in real wages, we doubt they would hike any more aggressively. •Tapering their QE reinvestments would be the gentlest way to tighten. If it helps, Mr Carney may then be able to have his ‘cake’ (unhindered consumption) & ‘eat it’ (still low policy rates)...
  • Neil Williams
    •Markets are taking more than a ‘glass half full’ view of the macro outlook, with little consideration of the new risk emerging. In the short term, this makes sense, as speculation, rightly, that major economies will open the fiscal box is sparking ‘reflation trades’. •Yet, while better for growth, markets are ignoring the darker cloud looming. Rather than financial distrust, we may need to brace for political distrust, with the threat of beggar-thy-neighbour policies - from the US to anti-European populism - rising. •In which case, markets face a year of two halves, where stimulus-euphoria gradually gives way to stagflation concern. Helpfully, the trade-off, though, is that policy rates stay lower than many expect. •The impact of protectionism this time could be far more complicated than in the 1930s. First, the economic & financial linkages suggest the knock-on would be more far reaching. Global retaliation would activate second-round effects that later offset the initial growth-impulse from Mr Trump’s tax cuts.
  • Neil Williams
    The ECB’s decision to extend, but taper, its QE does not herald anearly tightening of policy. The main policy (deposit) rate is likely to stay negative in 2017, & the fiscal side should be activated. While helpful in addressing the symptom, deflation, Mr Draghi cannot alone be expected to solve the underlying problem – a monetary union devoid of economic union. This will take years.
  • Neil Williams
    •After a year of political surprises, we could see tectonic shifts in economic policy. Speculation, rightly, that major economies will open the fiscal box is causing ‘reflation trades’ to puff up growth assets & make the bull-run in government bonds look even staler. •Yet, while better for growth, markets may be ignoring the new global risk emerging. Rather than financial distrust, we may need to brace for political distrust, with the threat of beggar-thy-neighbour policies - from the US to Europe - rising. •Amid these conflicting growth forces, our macro outlook is based on six core beliefs. First, governments in 2017 will offer fiscal solutions to add stimulus, try to appease electorates, & take the policy ‘baton’ back from central banks. •Second, this comes on top of monetary expansion. Nine years after the first traces of crisis, yet central banks daren’t lift the tide of liquidity hiding the sharp rocks beneath. Real rates will stay negative, with peak rates lower, & central banks unable to turn off their liquidity taps without unintended consequences.