Amundi Q&A: Prospects for the economy

We catch up with Christopher Morris, co-head of investments at Amundi UK Limited, about prospects for the UK and world economies in 2016.

 

R151. How has fixed income performed in 2015 and what have been the main contributors and detractors to performance?‎
CM: To us, fixed income and currencies go together – the same broad factors drive both. When we take a decision about a bond we separate out the currency decision. It has been a tough year. Going in, yields were low and they have stayed low. Only now do we have the first sniff of a rate hike, after expecting yields to rise for some time.

The US reported disappointing Q1 data and in the middle of the year we saw worries about China and emerging markets. Whenever we thought we were moving towards a more stable footing, something has come out of leftfield to destabilise the general global environment.

Certainly I don’t believe that the Feds’ expected hike will automatically cause other major central banks to start hiking rates in lock-step. Even the UK is signalling that it wants to be significantly behind the Fed, while the ECB is heading in opposite direction. We are set to see this policy divergence for some time to come.

R151. What about the UK economy specifically?
CM: The UK has been a confusing case study for the past 18 months. The economy is doing fine here, nobody should be in any doubt. We have seen a lift off by the housing market and a surprise pick up in employment – even though there wasn’t the full expected flow through to GDP. However, that anemic productivity is now improving.

The UK has been confusing in that the central bank has signalled some mixed messages – at some points seeming to want to bring forward expectations of a rate hike and then pushing back.

When the Fed starts hiking and the Bank of England doesn’t follow, there is a reasonable expectation that Sterling will weaken. If wages are also rising then inflationary pressures will increase. Some people say that is what we need.

R151: A headline in the FT recently reported that The Bank of England has declared an end to the post-crisis period. What does that mean for investors looking forward to 2016?
CM: I am sure the Bank of England wouldn’t have written a headline like that. I don’t think in any way that the Bank of England foresees a dramatic change in regulatory policy towards banks. They are still concerned about the potential for large contingent liabilities for the public purse. I am sure they are pleased with the progress banks have made but I don’t think a watershed has been reached.

R151: What particular stresses in particular worry you about the economy going forwards
CM: Broadly speaking next year should be better than 2015. We should see global growth pick up. China appears to be firming slightly – admittedly more on the private side than the state owned sector. But that will feed into demand for German and other European exports. If we don’t see that firming it would be a cause for concern.

Japan has been through a tough time, with their sales tax hike leading to weakness in the economy. Hopefully it should be able rebound.

US corporates should be making higher revenues and paying higher wages which should translate into stronger consumption there. If US consumers continued to show their recent uncharacteristic thriftiness, then that would be a weakness for global economy.

More significant, would be a pickup in inflation that led central banks to realise they are majorly behind the curve. If for any reason commodity prices were to pick up because of a negative supply shock in oil or an El Nino effect on food prices. If these prices stopped falling and started to go up – and if wages moved up rapidly in developed markets, central banks might have to hike rates more quickly than they have been signalling.

R151: What would the effect of a UK exit from the European Union be?
CM: This is a bit of a straw man. Clearly we will have a referendum in the next 12 months – the government wants to get it out of the way and it makes sense to get rid of the uncertainty. For me as an economist it makes economic sense to stay in the EU. I still believe that when the electorate sees some sort of reform package has been offered – even if not hugely significant –then they will conclude it is better than a jump into the unknown.

R151: Are the Eurozone worries over?
CM: In the Eurozone, credit growth is doing fine. The output gap is beginning to shrink. Almost all the major indicators are improving and we are in a more stable environment. Greece is hanging in there and it seems to be bearing fruit for now. We will see as they go through if they can maintain the positive momentum. Markets have now moved on and realised Greece is just 0.2% of the global economy. Now the issue is back in proportion and it has become a sideshow.

 

Christopher Morris joined Amundi’s London branch in October 2010. Prior to this, he was the senior London representative of the International Monetary Fund’s Monetary and Capital Markets Department working inside the Bank of England. He authored major parts of the IMF’s flagship Global Financial Stability Report. He worked in the IMF’s Tokyo office throughout the Asian crisis and before that at the Fund’s headquarters in Washington DC. Before joining the IMF, Morris worked in the UK Civil Service and helped in giving advice on privatisation to the governments of Hungary and Russia.

He graduated from the London School of Economics and has a master’s degree in economics from George Washington University in Washington D.C. He is also a qualified accountant.