The strong stock market performance should herald a stable year for the UK economy, defying fears of a slowdown, according to leading economist Simon Ward.
GDP growth should come in at around 1.8pc in 2018, he believes, indicating the UK economy will continue its resilient performance in the face of political uncertainty.
The chief economist at Janus Henderson has studied data from the past 51 years and believes a combination of stock market performance and money supply growth can be used as a guide to the coming year’s GDP growth.
He uses the FTSE Local UK index of shares in firms that make at least 70pc of their sales in the UK and Europe. It rose by 5.9pc over the past 12 months – a positive indicator for the British economy.
At the same time growth in the money supply – Mr Ward’s preferred measure includes the cash in circulation, bank deposits and other debt instruments, but not those held by banks – has slowed down, which points in the opposite direction. He believes this implies “a neutral outlook”.
“The neutral signal may indicate upside risk to the current consensus forecast of 1.6pc GDP growth in 2018,” he said.
“Reasons for modest optimism include: a prospective easing of the squeeze on real incomes as wage growth picks up and inflation moderates slightly; recent order numbers suggesting a recovery in construction output; and an expected Brexit transition agreement, which may encourage some companies to proceed with delayed investment plans.”
His forecast comes after growth accelerated in the third quarter of 2017. In December 2016, economists thought GDP would grow by 1.2pc over 2017 in a slowdown from 2016’s 1.9pc expansion. Instead, the economy is on track to grow by 1.8pc, barely slowing on the year.