Economic Outlook - July 2016
- The United Kingdom voted to exit the European Union and stock markets worldwide tumbled. The Brexit brings political and economic uncertainty; current Prime Minister David Cameron will resign and a host of new regulatory frameworks and trade agreements will need to be developed to conduct business and trade in a post E.U. world. Markets subsequently stabilized as fears receded that Brexit would disrupt the world economy. The U.K. is the world’s fifth-largest economy and a global financial center. The U.K. ranks seventh as a U.S. trade partner; American exports to Britain last year totaled $56 billion, or 0.3% of U.S. GDP. The European Central Bank president, Mario Draghi, told E.U. leaders that Britain’s decision to leave the E.U. could reduce eurozone growth by a cumulative 0.3% to 0.5%.
- Gross Domestic Product in the U.S. grew at a seasonally adjusted annual rate of 1.1% in the first quarter, faster than the previously estimated 0.8% pace. U.S. exports and company spending on software and research and development were better than initially estimated. Total business investment has declined as the energy sector continues to suffer from depressed oil markets, but there are indications the economy has regained momentum in the second quarter. Retail sales continue to grow and sales of existing homes rose to their highest level in nine years, reaching a new peak in May. Spending on home construction and remodeling has grown this year at the fastest pace in more than three years. Economists expect the expansion, now in its eighth year, to continue at a modest pace. We are expecting economic growth of around 2% this year.
- The U.S. dollar surged and interest rates fell on the Brexit news as investors sought relative safety in U.S. assets. An already wary Federal Reserve appears unlikely to raise U.S. interest rates anytime soon, in contrast to last year’s signal that rates might be pushed up four times this year. Key metrics such as inflation and wage growth are being closely watched. This year’s market turbulence, slow economic growth, and now Brexit, suggest a guarded approach to monetary policy and adjustments. Inflation hasn’t hit the Fed’s 2% target for more than four years. Foreign central banks are expected to act to counter a potential drag on the global economy after the Brexit vote, with possible rate cuts from the Bank of England, further stimulus from the European Central Bank, and flexibility from the Bank of Japan.
- Visionary or financially impractical? Tesla Motors, Inc., maker of battery-powered cars, announced a $2.8 billion offer to buy Solar City, the biggest U.S. rooftop solar installer. On the surface, the offer by a money-losing electric car company to buy a money-losing, debt-saddled solar company defies common sense and Tesla shares traded down over 10% on the news. Elon Musk, CEO of Tesla and Chairman of Solar City, has proposed a vertically integrated, clean energy company that would power one’s car, home, and business. Using solar panels to provide electricity for a home and a car would likely reduce the amount of time it takes for the solar system to pay for itself and reduce the cost of running an electric car over its lifetime. Has the future arrived?
Sources: Federal Reserve, Bloomberg LLC, Thomson Financial, National Association of Realtors, U.S. Department of Labor
* This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
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