In a consumer driven economy what matters is how people actually feel. Despite reports by political commentators and the media generally, since Trump’s election the US economy has had a postive vibe. Consumers in the post-election US continue to be more confident than their counterparts in Europe, the UK and Japan. A Capital Economics survey (see the graph below) highlights the different sentiment in the UK and US after “shock” results from both the Brexit referendum and US election.
Why the divergence between the UK and US? Even though both results were unexpected, the economic outcomes are completely different. Trump has proposed tax cuts, deregulation and a significant increase in infrastructure spending. These are all expansionary economic policies. By contrast Theresa May is faced with the potential downsizing of big banks and multinationals, renegotiating trade and less economic integration with the European Union. These are all contractionary scenarios.
It all comes down to growth prospects. For Trump, tax cuts and increased spending encourage consumers to be more confident about the economy. They expect more job choice, higher pay, and thus more spending power. This should lead to greater growth through the multiplier effect. Theresa May, on the other hand, is facing an economy expecting low growth over the medium to long-term due to truncated trade and lack of European integration – essentially UK consumers are becoming less confident about their jobs and more hesitant to spend. In this environment Sterling is likely to remain weak.