The prevailing theory among economists is that uncertainty and the unknown will make consumers less confident about their prospects and more cautious with spending. This would mean that uncertainty should act as a drag on growth. But in the past six months, amidst an uncertain political environment both in UK and US, economic growth has flourished and consumer confidence has soared.

In UK, Bank of England (BOE) had projected that second half 2016 GDP growth in UK will be negatively impacted following Brexit but then had to admit that gloomy forecasts was simply wrong. In stark contrast to BOE’s lack of economic growth forecast, UK’s GDP, released on tuesday this week, grew 2.2% in the fourth quarter of 2016. Of course, economists jumped to predict that Brexit uncertainty is likely to dampen growth in 2017, despite the resilient growth in the last three months of 2016.

In the US, economists that cautioned that a Trump victory and his views on trade, taxes, regulations, immigration and other issues will increase uncertainty and would curb household and investor enthusiasm and consequently drag down economic growth. Despite Trump’s unpredictable victory and the continued uncertainty over his policies, consumer confidence index reached 113.8 in Dec 2016,  the highest level since Aug 2001 and Dow Jones passed 20,000 earlier this week and is hitting new highs. Economic data suggests a healthy economy in the US with low unemployment levels and the prospect of cut in tax rates this year is expected to further strengthen the economy.

Future Wealth’s View

The joke is that “God created economists to make the weatherman look better”. Economists are now battling uncertainty about uncertainty and this brings back memories of Donald Rumsfeld’s famous quote – “There are known unknowns and unknown unknowns”. But instead of debunking all economists and their uncertainty theories, we would like to embrace factual information. British Economist A.W. Philips suggested that with strong economic growth, low employment rate is achieved but is also subject to the prospect of higher inflation (also known as Phillips Curve). Economic data we have currently, supports his thesis. Managing the delicate balance between unemployment rate and inflation rate is the challenge that lies ahead, in our view. While some may be looking for “alternative facts”, at Future Wealth, we are inclined to stick with economic facts.

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