Good morning, this is Paul Donovan, Chief Economist at UBS Global Wealth Management. It's 7 o'clock in the morning London time on Tuesday the 17th of December. While we all wait for the nirvana that will occur when economists rule the earth, politicians are interfering and creating background noise in financial markets.
Germany is set for elections in February of next year, following the government's defeat in a vote of confidence yesterday. This is a surprise to absolutely no one, and elections would have been coming anyway. The timetable is just a little accelerated by this vote.
Deep soul-searching about relatively insignificant fiscal deficit changes are now expected to play a prominent role in the German political agenda. Meanwhile in Canada, Finance Minister Freeland has resigned from the government in a dispute with Prime Minister Trudeau over the best way to handle US President-elect Trump. Freeland suggested Trump was pursuing economic nationalism, which is of course what many countries are pursuing today.
In a world of scapegoat economics and prejudiced politics, blaming foreigners for everything that is going wrong is always a convenient excuse. Freeland's resignation goes beyond Canadian markets in that it signals the political disagreements the rising trend of economic nationalism is likely to bring. Prejudiced politics is extremely economically damaging in the long term, but it can prove to be politically popular in the short term.
Other countries are likely to see fault lines like this emerge. The UK has published some unreliable labour market data for October and November. The Office for National Statistics has admitted that they might not know what is happening in the UK labour market until 2027.
The only redeeming feature is that at least the ONS has the honesty to admit the flaws in their data. Other statistical agencies just publish the numbers anyway. The UK data hints at a relatively strong labour market.
Real average earnings are increasing. That does not mean that labour costs are increasing at the same pace as there is capital for labour substitution going on and the composition of the workforce may be changing. The employment growth in October was still pretty strong and unemployment rates are basically static.
The dire forecasts of business sentiment surveys are not showing up in the data at all. There might be a lag conceivably, but last year's negative projections on employment also never materialised. This is consistent with the stately pace of rate cuts from the Bank of England that we have been experiencing.
The rather more frantic rate cuts of the ECB are not likely to be matched by the UK. From the United States we have retail sales data for November. There is also industrial production data, but economically the US is far more important for what its consumers consume than what its manufacturers make.
The US consumer remains in a good place. Savings have not really been run down and, despite the misperception, real incomes are actually higher. The data suggests that the US consumer has never had it so good.
However, the bias to having fun does mean that this is not fully reflected in the retail sales numbers. Only a few fun categories are included in retail sales data – restaurants, bars and clothing primarily. There are people who might consider the purchase of a washing machine to be fun, but that would be a relatively niche view.
That's all for today. Have a good day. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG or its affiliate UBS.
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