 Should we be ready for $150 dollar Oil …
It’s a fair call. Oil trades at $123 dollars a barrel Brent Crude Basis as we write. West Texas WTI trades at $122. It’s a tight spread. Despite the forecasts of a slow down in world growth from the World Bank, the OECD and the IMF, demand for oil remains strong and looks set to continue for the rest of the year. The shortage of refining capacity is exacerbating retail fuel prices. Refinery capacity was hit during Covid. Capacity has not yet been replaced. Investment intentions are subdued. Oil companies are concerned about tight margins. They are not entirely sure about future demand patterns and the sustainability of higher prices. Investor pressures, with an ESG agenda, are inhibiting investment plans. Supply Side Constraints Continue … OPEC it is argued has less than 2 million barrels per day in spare capacity. In the USA, despite the surge in prices, the oil rig count remains well below historic levels. The Baker Hughes US oil rig count was 574 last week as oil prices Brent Crude averaged $124 dollars. A strong recovery from the drop below 200 in 2020 but still well below the 800 count pre Covid, when prices averaged $70 per barrel. Go back ten years and $120 oil would bring 1400 rigs into action. Material constraints and labour shortages are blamed for the tardy response. Investors are concerned about the ESG agenda and the vagaries of future returns. Principal producers are not entirely convinced about the sustainability of $100 plus oil into the short and medium term. The Shock of War … The OECD explained this week, “limiting Russia’s ability to finance the war In Ukraine, by an embargo on Russian oil exports, is essential for speeding up an end to the devastating conflict”. European economies are struggling to wean themselves off Russian fuel. Alternative energy sources may not be so easy to ramp up quickly. There is a risk of higher prices or even shortages. It is argued. The U.S. Energy Information Administration estimates that 2 million bpd could be lost as Russia winds down production. This is a greater amount it is suggested, than new production in the USA and OPEC may be able to cover. The Biden administration is keen to ease prices pressures at the pumps. Stocks have been released from the U.S. Strategic Petroleum Reserve, with plans for further releases in the Autumn. Overtures to OPEC have been made. The Saudis have agreed to a modest boost to output in July and August. Traders are unconvinced. OPEC will be keen to harvest inflated margins as long as demand destruction doesn’t follow from the price hikes. The U.S. EIA Short term energy outlook (June) expects the Brent Crude price to average $108 dollar per barrel in the second half of 2022 falling to $97 dollars in 2023. For the moment $150 dollar oil may be just a traders dream. $20 dollar oil in April 2020 a long distant memory.
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 In January this year, the IMF were forecasting world growth of 4.4% in 2022. This was a modest slow down from growth of around 6.0% in the prior year.
Growth in the U.S. and Europe was expected to be around 4.0%. Growth in the UK and China was expected to be about 4.5%. Concerns were expressed around Covid continuance, energy price rises, supply side disruptions, transport costs, tight labour markets and higher inflation. "Risks to the global baseline are tilted to the downside". The IMF stated. "The probability of a major natural disaster remains elevated". Then in March, Russia invaded Ukraine. Sanctions were imposed on Russia. The ruble collapsed by 30%. Domestic interest rates were hiked to 20%. Capital controls were imposed. The Iron Curtain was redrawn albeit with a gas leak for now. The concept of Cold War returned. Moscow placed on ICE, a policy of Isolation, Containment and Exclusion in prospect. So What Now of World Growth? In our Friday Forward Guidance this week, we outline the new monetary framework for the West. On Monday we will confirm our outlook for markets. Higher rates will lead to lower growth, achieving little impact on inflation in the short term. Bond yields are rising, pension deficits will be shrinking. The prospects for equities now positive, following the sell offs in Asia, North America and Europe. The Economist Intelligence Unit suggested this month, the impact of the war will be a loss of some $400 billion dollars this year. That equates to a loss of 0.4% of GDP. The downside, however, could be as much as a full one percentage point or $1 trillion dollars. "The economic impact of the conflict will be felt mostly in Ukraine and Russia. Both will experience sharp recessions this year. Those eastern European countries most exposed to trade with Russia, such as Lithuania and Latvia, will also take a hit from the conflict. Elsewhere in Europe, the EU will suffer from an energy, supply-chain and trade shock." Oxford Economics suggests the impact on global GDP will be muted in Asia and North America. The impact will be greater in Russia and Europe. The loss of global output this year is expected to be 0.6% in 2022 and 1.1% in 2023. NIESR are more bearish. Using NIGEM, the global econometric model, NIESR suggests the impact of the war in Ukraine could reduce the level of Global GDP by 1%. That's about $1 trillion dollars. The conflict would also add some 3% to global inflation this year and 2% next. Country Forecasts Our own simulations suggest world growth will be 3.5% this year. This is based on changes to the January IMF outlook as follows. U.S. growth is downgraded to 3%, slightly above the FOMC forecast this week of 2.8%. In China, the IMF forecast of 4.8% is upgraded to 5.0%. This is a slight discount to the official growth target of 5.5% in the current year. Covid restrictions and lock downs in Shenzen and Jilin could impact further on the full year outlook. In Europe, Germany will be the most severely affected. The overall shock to growth is expected to be between 0.5% and 1.0%. We will update our UK forecasts in greater detail next week. The IMF were forecasting UK growth of 4.7% this year following growth of 7.5% last year. This month, the HM Treasury summary of forecasts for the UK economy, suggested growth would slow to around 4% this year. It would appear to be a fair bet for the moment. We await with interest the OBR updates next week. So what of Inflation ... In the West, we were already braced for the impact of rising energy and commodity prices. Oil Brent Crude trading at $98 dollars a barrel in February, gas prices spiking at over $5.00 per therm. Shipping costs on the rise again. Gold always an attention grabber, testing $2,000. We didn't really take a look at wheat prices hovering at $800 per tonne. Then came the leap to $1,300 as the tanks rolled into "The Bread Basket of Europe". The OECD chart marks the spike in commodity prices following the conflict in Ukraine. Energy features along with the hike in metal prices, Nickel, Platinum and Palladium. Wheat and Corn are high on the list. [Not featured are the increases in rape seed oil and fertilizer.] Russia and Ukraine account for almost 30% of the world’s wheat exports. Russia supplies 16% of the world’s fertilizer. Ukraine is a major producer of neon, a key input for the production of semiconductors. Fears abound Russia could more aggressively restrict key exports to Western countries of grain, titanium, palladium, aluminum, nickel, timber, and oil and gas. Russia is a vital supplier. Restrictions would send shock waves throughout the global economy. Concerns are rising over food and famine. Turkey, Egypt, Israel, Tunisia, Thailand, Indonesia, Greece and Morocco are particularly dependent on Russia and Ukraine for imports of grain. In Egypt and Turkey the dependency is over 70%. So what of inflation? The OECD expects a substantial hit to inflation in the current year. For the world economy as a whole, the increase is expected to be 2.5%, in Europe just over 2%. In the USA, the impact slightly more muted at 1.5%. In the UK, the Bank of England now expects inflation to peak at around 9%, compared to just over 7% prior to the invasion. In Russia, inflation is expected to surge to between 20% and 30%. The pressure on Putin is increasing. The President is lashing out at traitors and fifth columnists in Russian society. Arrests of key players in military and FSB are underway. In Ukraine, the death toll continues to mount. The shocking news clips continue ... the rise in inflation and lower growth, a modest inconvenience in comparison to real hardship ... That's all for this week. Next week we will focus on the UK Economy following the Chancellor's Spring statement and the ORR updates. Don't miss our Monday Morning Markets update out on Monday. Markets rallied this week. The overall bounce was around 5%. Hang Seng bounced but still has a "buy in bundles" tag. China is softening the stance on tech. It is time to take a look again at mainland stocks. Gold slipped to $1,929, Oil Brent Crude closed at $107 dollars. Sterling traded up against the Dollar. Bond yields strike our first level target. More in bond yields to follow by the end of the year ... Have a great weekend, John  Joe Biden made it clear this week, NATO will not go to war with Russia to defend Ukraine. "We are going to provide more support but we will strive to prevent a direct clash [with Russian forces]."
He went on to say, direct confrontation would lead to World War Three, something we must strive to prevent. However, the US would defend every inch of territory of its NATO allies if attacked, no matter the consequences. It was a clear evidence of the resolve of western allies to resist further Kremlin aggression. It's also confirmation, the West needs a little more time to prepare for conflict. World War III is also something President Putin will strive to prevent. Putin knows this would be a war, which he could not win. The numbers just do not add up for Mother Russia. In 2021 the IMF ranked the Russian economy as eleventh largest in the world, squeezed out of the ten by South Korea and Canada. A GDP estimate of $1.6 trillion dollars for the Russian economy, contrasts with a combined NATO GDP estimate of almost $45 trillion dollars. In military spending, it is estimated the Russian economy spent some $48 billion dollars in 2021. That compares with an estimated $750 billion in the same year for Uncle Sam. Germany has now vowed to increase spending to over $80 billion. Combined NATO spending last year on military defense was over $1 trillion dollars. That's twenty to one out spend for the would be aggressor. Ukraine is demonstrating just what can be achieved with a more modest $5 billion spend. The beleaguered country will continue to receive substantial support in funding and military supplies as the war drags on. Russian military has demonstrated the vulnerability of infantry and armed vehicles to drone and anti tank attacks. The importance or air superiority critical to support of ground forces. In Putin's world, tanks are used in World War III, as cavalry was initially employed in World War I, with US jets as escort. EU leaders have announced their intention to collectively rearm and become autonomous in food, energy and military hardware in a Versailles declaration that described Russia’s war as “a tectonic shift in European history”. Putin and Russia face a period of Moscow on ICE. Isolation, Containment and Exclusion. The Iron Curtain is closing, albeit with a gas leak for now. Slowly but surely the leaks will be plugged. More importantly, in the short term, the future of the people of Ukraine is in the balance. We continue to be deeply shocked and saddened as the terrible events unfold ... The Ukraine Battle Map ... So how will events develop in Ukraine"" Putin has made it clear this is not a war, it's a "Special Military Operation". Foreign Minister, Sergey Lavrov, stated this week, "We did not attack Ukraine". Of course not, presumably it was more of a joint military exercise with close neighbours. It was a process of invasion, annexation and installation of a puppet regime. The process has failed. Lavrov also went on to say, if there is a World War III, it will be nuclear. Putin has made several threats of nuclear force in recent weeks. He would consider wielding atomic weapons if NATO forces got directly involved in defending Ukraine. Russia run a similar playbook in 2014. As Putin invaded Crimea and eastern Ukraine’s Donbass region, he said, “Russia is one of the leading nuclear powers. It is best, not to mess with us.” Russian officials relayed similar threats to Western leaders. Russia did not put its nuclear forces on high alert. Putin later bragged that he almost did. So how will this end? Annexation of Ukraine unlikely. Partition of Ukraine possible. The lines may be drawn between Kyiv and Odessa or East of the Dnipro River or a reversion to the "Status quo ante bellum". Ukraine independence assured, Moldova Sweden and Finland may then seek security with NATO. The Cold War returns. Europe develops an alternative energy policy. Energy costs rise, food costs rise, metal costs rise. Inflation rises, growth slows, recession avoided, perhaps not for Putin. This will be the last in our trilogy on Putin. Next week we really will try to put some numbers on growth and inflation ... Thanks for Reading ... Don't miss our Monday Morning Markets update out on Monday. Markets steadied this week, European stocks rallied. Most moved into oversold territory. Hang Seng had a "buy in bundles" sign as markets fear the worst for China tech. Gold slipped below $2,000, Oil Brent Crude closed at $111 dollars. Sterling slipped further against the Dollar. Have a great weekend, John  Deeper and Deeper ...
At the NATO summit last year, the West gave encouragement to Ukraine to join the Alliance. Little thought was given to the reaction of Moscow to such a potential tectonic shift in the balance of power in the East. In November last year, the U.S. and Ukraine signed the Charter of Strategic Partnership. America affirmed Kyiv's right to pursue membership of NATO. It was a step too far for Putin. We outlined last week, the importance of buffer states from the Black Sea to the Baltic, from Crimea to Kalingrad, to an increasingly threatened Mother Russia. For Putin, the Charter was indeed a step too far. Preparations immediately began for Russia's so-called "Special Military Operation" in Ukraine. Ukraine has long held a special place in Putin's buffer zone. In 2007 at the Munich conference, Putin had made it clear, his speech was a rant against Ukraine ever joining NATO. In 2021 he wrote "Ukrainians and Russians are one people", never to be separated. Let's face it, the Ukrainians have long held a special place in Mother Russia. Millions were allowed to die from starvation in the early 1930s as Stalin imposed his authoritarian, agrarian adventure, at the cost of so many innocent lives. Putin believed war could be avoided simply by the show of force along the Ukrainian borders to the North, South and East. Zelensky's government would bow to the threat of invasion by such a great global power. Kyiv would reach an accommodation with Moscow to avoid large scale destruction. Putin's ring of steel would be guaranteed. His reputation inscribed in history along with Ivan the Terrible. Special Thanks to Robert Service "The Two Blunders That Caused the Ukraine War" Interview with Tunku Varadarajan Wall Street Journal 5th March 2022. The Great NATO miscalculation ... Putin underestimated Zelensky. He seriously underestimated how the leaders of the "Free World" and NATO would react. Perhaps it was an easy mistake to make. Putin had enjoyed four years of laissez-faire with Trump. The U.S. President had demonstrated his disdain for democracy and the admiration of President Putin. A President in power twenty years had a certain appeal, especially with the bonus of a little crony corruption on the side. Trump had also demonstrated indifference to the NATO Alliance. He berated close allies with long over due debts to Uncle Sam. More votes were on offer at home from an aggressive stance with China. Trump was struggling with the Thucydides trap. The rise of Sparta ensured war with Athens was inevitable. So too it was said, the rise of China would lead to inevitable war in the South China Sea. Joe Biden appeared to offer even less of a threat. Walk tall and carry a big stick. Biden struggled to walk tall carrying a walking stick. In Germany, the retirement of Angela Merkel would create a leadership vacuum. The Germans were hooked on Russian Gas. Nord Stream two would guarantee a permanent fix. The European Union had been dealt a serious blow with the abdication of Britain from the economic alliance. Putin would have been unimpressed by Defence Secretary Williamson's, now Sir Gavin Williamson's remarks that Russia should go away and shut up. The Tanks Rolled over the Border The Tanks Rolled over the Border and into the abyss. Zelensky held firm. The Ukrainian people defiant. The invasion stalled. The Russians upgraded the levels of civilian attacks and large scale destruction. It is like watching a 1930's news clip. The annexation of a sovereign state, millions of refugees feeling across Europe, a dictator unchallenged at home, the West prepares for war, the threat of nuclear detonation returns. Sanctions imposed on Russia and the Oligarchs. Russian central bank assets frozen. Putin achieved what Trump could not. The Germans vowed to increase spending to meet the NATO commitment. Georgia and Moldova apply for EU membership. Sweden and Finland may join the alliance. Higher inflation and lower growth in prospect. Oil trades at $120 dollars his morning. Commodity prices are soaring. Russian stock markets are collapsing. The Russian economy will be badly damaged in the process. In our next update, we will try to pull together the forecasts for growth and inflation in the year ahead. Meanwhile the tragedy in Ukraine continues ...  The Iron Curtain Returns with Gas Leaks ...
"This is a globally systemic event" said Timothy Ash, global strategist at Blue Ray Asset Management this week. Reacting to news of the Russian invasion of Ukraine, he added "Putin is redrawing an iron curtain across Europe." The iron curtain is returning, albeit with gas leaks. Gazprom continues to pump gas through Ukraine into Western Europe. Nord Stream 2 it would appear, is lost as an option for the moment. Putin had begun the big move on Ukraine, with formal recognition of the Eastern provinces of Donetsk and Luhansk. The "People's Republics" would fall under the protection of Putin's Duma. Many believed the advance into Eastern Ukraine would stop or at least stall to await the next stage. It was a strategy that had worked well for Putin. The objective, to create a series of buffer states, in defense of the Motherland. The challenge to bolster defenses against the encroachments of NATO. In the South, in Georgia, Armenia, Azerbaijan and Kazakhstan, Russian troops had been installed as peacekeepers. In the West, in Belarus, President Alexander Lukashenko, invited in Russian troops to support his tottering regime. Now the move on Ukraine to complete the line from Crimea to Kalingrad. No wonder the Baltic states of Latvia, Lithuania and Estonia are upgrading their alert status. The CIA had warned of a large scale invasion. The strategy and battle maps were uploaded to social media. It seemed impossible to think Putin would make the move. As kids we were brought up in the cold war era. We had lived through 1956 and 1968, the repression of freedoms in Hungary and Czechoslovakia. In 1962 we had lived on the edge of the Cuban missile crisis. We were warned to white wash the windows and sit under the staircase in the event of a nuclear strike. It was the MAD age in international diplomacy. The concept of Mutually Assured Destruction was rife in international strategy. One strike and everyone would die. Apart from the ruling elite who would be transferred to a five star underground base, with top line catering facilities. It was an expansionist era ended brutally for the Russian Empire by the 1980 move into Afghanistan.. The "great game" was over. It was an era confined to history or so we thought. Now Putin returns with a 1938 playbook. It didn't end well then, it will not end well now. As with Afghanistan, Ukraine could be a move too far for the Russian state. Sanctions imposed. The Russians will be excluded from the Eurovision Song Contest. More significantly, China is distancing itself from Russia. Foreign Minister Wang Yi said this week ... "China has been following the evolution of the Ukraine issue. The present situation is something China does not want to see". Indeed it is something the world does not want to see. Our thoughts are with the people of Ukraine ... the annexation of sovereign territory unthinkable in the era of peace and globalization ... Economic Impact ... A look at the map to the West, explains the fears of the Russian state to the East. Nation states fear encirclement. NATO additions of the Baltic states together with Romania, Bulgaria and Slovakia are cruel reminders to the Kremlin, of the loss of a Russian empire in a bye gone age. The possible additions of Georgia and Ukraine would put Belarus and Kalingrad at risk. The Putin playbook must sit in that context. It is important for the West to understand the mind set. So what will the economic impact be? Economists are seeking to measure the impact of sanctions and trade tensions with the Russian State. The risks are primarily to growth and inflation. Oxford Economics expect world growth to be impacted by just -0.5% over a three year period. In Russia, the damage to growth is most severe. A growth set back of 3% over three years seems in prospect. In Europe the output loss will be around 1.5%, slightly less in the UK at around 1.3%. The U.S. economy will be largely unaffected. One reason why U.S. markets rallied toward the end of the week. The second impact is on inflation. Food and energy costs the prime movers. Oil prices closed up in the week at $96 dollars per barrel, down from $105 the mid week highs. Gas prices were unchanged over the week. Gazprom keeps on pumping through Ukraine into Germany. The Russians seek to grab the "Breadbasket of Europe". Prices may rise. Let's hope a peaceful end to the conflict appears soon as the price of life continues to rise ...  Inflation, CPI basis edged higher to 5.5% in January, up from 5.4% in December. It was a modest move, made easier by the slow down in service sector inflation, to 3.2% from 3.4% prior month.
Goods inflation, on the other hand, increased to 7.2%. Food prices were up by 4.5%. Clothing and footwear costs up 6.5%. Furniture and household appliances up 10%. Electricity and gas bills were up by over 20%. Thinking of buying a second hand car? You will be paying almost 30% more than January last year. Filling up the tank will cost 25% more on average. Oil prices to blame. Oil closed down slightly at $92.66 at the end of the week. $92 dollars compares with an average $62 dollars last year, a 50% inflationary impact. Producer output prices increased to 9.9% in the month. Input costs for manufacturers increased by 13.6%. This was down on the 15% hike in November. A hint perhaps cost pressures are set to ease? Oil prices, metals and chemicals feature heavily in the cost burden. Food costs, both home grown and imported, are up by around 6%. Thanks heavens for the moment, we don't have to worry about the exchange rate. Sterling closed at $1.36 against the dollar.$1.35 is our forecast outlook. The Bank of England expects inflation to peak at just over 7% in April. Trending lower thereafter, towards 3% by the end of the year. In the U.S. inflation hit 7.5% in January. Prices are expected to ease to 3.5% by December. In Europe, inflation increased to 5.1% in January. The ECB expects inflation to return to the 2% target by the end of the year. The price surge, is part of the Tsunami after wave, of the seismic pandemic shock. Oil prices reflect constraints to output in Russia, North America and OPEC. Exacerbated by geopolitical tensions on NATO's borders, we still expect prices to soften into the year. The inflation impact then eases into the second half. In our Friday Forward Guidance we discuss the implications for interest rates in the U.S., U.K. and Europe. Interest rates are projected to end the year at 1.25% in the U.S. and the U.K. They may well be higher at 1.50%. We expect some follow me action by the ECB. One of the key issues for the MPC, is just what happens next to wages ... Labour Market Update ... Another incredible set of figures for the UK Labour Market. Unemployment fell to 1.374 million in December. Vacancies increased to 1.298 million in January. The unemployment rate was 4.1%. The UV rate, unemployed to vacancies rate, was just 1.06. The number in employment was 32.5 million. That's down from 33.0 million in the first quarter of 2020. 8.8 million were classified as inactive, compared to 8.5 million in Q1 2020. More in employment, up by 400,000. Fewer self employed, down by 800,000. More working full time, up by 700,000, fewer working part time, down by 300,000. 300,000 more now inactive. It all makes for a challenging recruitment market. Earnings increased by 4.3% in December, down from the peak of 8.8% in June. The trend is tracking our forecast model. We expect earnings to average around 3.5% by the end of the year. The real earnings squeeze in the first half of the year should ease by the final quarter. The Governor of the Bank of England has issued a warning about high wage demands. Higher base rates will be the result of excessive earnings increases. Recruiters are struggling to meet jobs quotas. Turnover rates are increasing. It doesn't make for a modest pay round this year. Central bankers are taking away the punch bowl. Time to pay for your own drinks ...  The First Quarterly Estimate of GDP growth in 2021 was released this week. GDP growth increased by 7.5% compared to prior year. The number was exactly in line with our central forecast. It could well edge higher in subsequent releases.
Construction growth was up by 12.7% in the year, following a 16% setback in 2021. Service sector growth underpinned the recovery, up by 7.4%. Manufacturing increased by 7% following a 9% downturn in 2020. Output stalled into the second half of the year, as component shortages and supply side difficulties increased. Levels flat lined in the final quarter. There is a problem within the data set. The estimate for manufacturing output will be revised up to 8% or more in later releases, pushing overall GDP growth towards our higher 8% level. We model GDP(O) in our forecasts for the economy. It is the closest comparison to business modeling one can get. No theoretical overlays besetting the expenditure models. We also model trade. The revisions to the trade figures reveal an increase in the trade in goods deficit to £156 billion from £139 billion prior year. At 7% of GDP this of itself is problematic. More concerning, the trade in services surplus fell to £127 billion from £132 billion. Even as the tourism deficit fell. The overall trade deficit increased to £29 billion from the £3 billion surplus prior year. At just over 1% of GDP, that's hardly stuff for a balance of payments crisis. Enough to ensure capital flows will cap any real upside for Sterling. The Benefits of Brexit ... Reading this week "The Benefits of Brexit" it runs to 105 pages. Particularly inspired by the ability to use the crown stamp on pint glasses, moved to tears by the return of the "iconic blue passports". " This marks "A return to their original appearance of the color first introduced in 1921". David Lloyd George was in office, car tax discs were introduced and the PM moved into Chequers. Excellent! Good news Jacob Rees-Mogg has been made minister for Brexit opportunities. It will begin with a trawl through the Benefits of Brexit document to begin with. First having completed the search for the holy grail. Good news, the trade in goods deficit with the EU fell by 20% last year to £70 billion. Not so great really, the deficit with the rest of the world doubled to £80 billion. Truly global Britain offering greater import opportunities around the world. Markets Excite About Base Rate Hikes ... Markets are impressed by the growth data. They now assume the Bank of England will be more aggressive in tightening monetary policy this year. In our Friday Forward Guidance, we plug in a base rate forecast 1.25% by the end of the year. In the US, traders now expect a 50 basis point rise by the Fed in March. Super hawks in the UK now think a similar hike could be possible by the Bank. Base rates would end the year at 2%.. This would seem to be at odds with the statements from Governor Andrew Bailey and Chief Economist Huw Pill. Step by step, steady and sure the mantra. Bond yields failed to hold the 1.50 level at close. Watch our for our Friday Forward Guidance for regular updates. So what of growth this year? Watching the NIESR Economic Outlook update yesterday, the NIESR forecast for growth in 2022 is 4.8% compared to the rather gloomy Bank of England estimate of 3.75%. Analysts are concerned about the cost of living squeeze and the rise in taxation and interest rates. For the moment we still think growth could be around 5% or more this year. The output gap to trend will average 4% through the year. Capacity to be realised. The recovery continues. The Bank will be cautious about killing the bounce back. We will expand on this in greater detail in the weeks to come, no doubt. "The Benefits of Brexit", "The Leveling Up Agenda", "Sound Bites and Sophistry" Tory back benchers are nervous. Two years to go to the next election. Time is running out as tax hikes and rate are brought in ... That's all for this week really looking forward to Our Monday Morning Market Update next week. Markets steady, Bond Yields Surge, Crypto Rallies, Tech Stocks Tormented, Sterling Higher, Don't Miss that! Have a great weekend, Leveling Up : United Kingdom ... Child Poverty The Missing Metric in the Leveling Up Agenda ...10/2/2022  Writing in the Times this week, David Smith, Economics Editor of the Sunday Times said "I find it hard to disagree with the more robust assessment provided by the Oxford Economics consultancy." The report said: “The leveling-up white paper contains nothing to cause us to revise our forecasts for the UK’s various nations and regions, let alone the UK as a whole. While it contains many fine sentiments, there’s little that is new or significant. “Many of the targets and missions outlined are pre-existing or vague, with little of substance in the scale of resources committed or the delivery mechanisms and projects involved." Child Poverty The Missing Metric in the leveling up agenda ... The government announced 12 missions and 49 metrics in the leveling up agenda. Much on health, education and well being, not much on child poverty. Child Poverty is 40% in Rochdale and 4% in Richmond. Child Poverty really is the Missing Metric In the Leveling Up Agenda. Here are six of the twelve key objectives. SMART Objectives? "Specific, Measurable, Achievable, Realistic, Time bound", you be the judge. Mission 5: By 2030, the number of primary school children achieving the expected standard in reading, writing and maths will have significantly increased. Mission 6: By 2030, the number of people successfully completing high-quality skills training will have significantly increased in every area of the UK. Mission 7: By 2030, the gap in Healthy Life Expectancy (HLE) between local areas where it is highest and lowest will have narrowed. By 2035 HLE will rise by five years. Mission 8: By 2030, well-being will have improved in every area of the UK, with the gap between top performing and other areas closing. Mission 9: By 2030, pride in place, such as people’s satisfaction with their town centre and engagement in local culture and community, will have risen in every area of the UK. Mission 11: By 2030, homicide, serious violence and neighbourhood crime will have fallen, focused on the worst-affected areas. Twelve Missions and Forty Nine Metrics are included in the leveling-up white paper. Child Poverty is the Missing Mission and Metric in the leveling up agenda. An investment in the reduction of levels of Child Poverty across the regions would do much to accelerate the targets for health care, well being, education and skills. Early stage investment in Child Poverty reduces the later costs to the economy in healthcare, social care and education. It may even lead to the great nirvana of higher productivity in later life. 40% in Rochdale and 4% in Richmond, Child Poverty is the Missing Mission and Metric in the leveling up agenda. Why not include Child Poverty? That really is a SMART objective ...   The Bank of England increased base rates by 25 basis points on Thursday. It could have been worse. Four members of the MPC voted for a 50 point increase.
Inflation is expected to peak at around 7.25% in April. The squeeze on incomes will be the most severe since Ed Conway was a lad. Post tax incomes are expected to drop by 2%. Growth in the year is expected to slow to 3.75%. It gets worse next year, the growth rate drops to just over 1%. The Governor is worried about the impact of energy costs. Households are in for a difficult period, he warned. Ofgem announced a huge 50% plus hike in the energy cap. The cap will rise by £693 to £1,971 in April. He needn't have worried over much. Over in the House of Commons, Chancellor Rishi Sunak was explaining how the Treasury will help with household energy bills. National Insurance charges will go up. Council taxes will go down. Every household will be given £200 subsidy in September, to be paid back over four years. It was difficult to know just what to watch on Thursday. The Chancellor in the House. The Governor in The Bank. Or the Sky News live count of special advisers leaving Downing Street. To bolster up support on the back benches, more detail of the leveling up agenda was revealed. Michael Gove is to relocate to Wolverhampton. Andy Haldane, co-author of the report, explained the UK should be like Renaissance Florence. An emphasis on the discovery of new worlds perhaps, the government is accelerating the Medici income inequality gap to match the period, OK. Leveling up will be great. If every area in the country moves above average, the income growth will just about enough to pay for the NHS. Our new report "Truly global Britain, leveling up, in a country that works for everyone, with a balanced economy and a march of the makers, not along the M20 because it's full of lorries stuck in traffic" will be out soon. The Governor announced new tools to fight inflation ... The Governor announced new tools to fight inflation. Rising rates, the end of QE and a request to workers not to ask for a big pay increase. Andrew Bailey wants to see, "Clear Restraint" in the annual wage bargaining process. Ouch! Sharon Graham, the Gen Sec of Unite said "Why is it, every time there is a crisis, rich men ask ordinary people to pay for it". It was a bit of an own goal. Number Ten played the offside rule. The Prime Minister's official spokesman said pay restraint was not something the Prime Minister was asking for. "We want a high wage, high growth economy and we want people's wages to increase". The Governor should butt out and stick to hiking rates. Good to know policy makers are on the same page. The lack of documentation for industrial strategy and energy policy doesn't help. Sound bites and photo ops hardly the solution. Misleading statements on key stats compound the problem. The Prime Minister and Home Secretary were rebuked by the UK stats authority. It may be correct, "We are cutting crime by 14%" as long as fraud and computer crime are not included, small detail. Priti Patel is still fuming, a demand to send our aircraft carrier to the Channel to bomb the migrant dinghies, refused by the Royal Navy. The ship with planes is currently on manoeuvres in the Baltic Sea, the Black Sea and the Taiwan Straits, bit stretched. Over in Beijing China is hosting the Winter Olympics. An expression of peace, co-operation and friendship the theme. Western leaders are absent. Putin holds a starter pistol. A new gas contract in his pocket. Add no foreign policy to the missing documentation for government ... That's all for this week really looking forward to Our Monday Morning Market Update next week. Markets steady, Bond Yields Surge, Crypto Rallies, Tech Stocks Tormented, Sterling Higher, Don't Miss that! Have a great weekend, John To understand the markets, you have to understand the economics ... Friday Forward Guidance, The Saturday Economist, Monday Morning Markets ... Forward to a Friend of Colleague, the can register for our FREE updates here. It's Only Fair To Share !  The January IMF Update ...
The IMF released the latest World Economic Outlook this week. Growth is expected to moderate this year to 4.4% from 5.9% last year. The revision is a downward adjustment of 0.5%. In the earlier October forecast, growth of 4.9% was expected. Weaker growth is expected. The shadow of the Omicron virus overhangs activity. Countries have reimposed mobility and work restrictions. Supply disruptions have continued into the new year. Rising shipping charges, energy prices and metal costs have resulted in higher and more broadly based inflation than anticipated. Interest rates are set to rise in the U.S. and the West to offset the inflation surge. China seeks to alleviate monetary policy in the East. Next year, world growth is expected to slow further to 3.8%. This is slightly better than the 3.6% forecast in October. The IMF cautions, the forecast is conditional on an alleviation of health conditions and restrictions. Faster and wider vaccination would be of assistance. Better health therapies would also help. World Trade and Inflation ... World trade is forecast to increase by 6% in 2022 and by 5% in 2023. A strong background for international activity set to continue. World shipping rates are set to fall back to trend average towards the end of the year. Inflation pressures are set to ease. The IMF expects inflation to average 3.9% amongst the advance economies in the year slowing to just over 2% next year. In emerging markets, inflation will rise to 5.9% this year up from 5.7% last year. Headline inflation will moderate (but not by much) to 4.7% next. Oil and gas prices are key to the inflation outlook. The IMF assumes an oil price of around $80 dollars per barrel Brent Crude basis. Oil traded at $90 dollars at the end of last week. Geo political tensions pushing prices higher. $75 - $80 dollars remains our benchmark call for the year. Risks to the global baseline are tilted to the downside, the IMF warns. The pandemic, supply chain disruptions, energy prices, rising wage costs may impact on growth. Risks to currencies, capital flows and asset prices may result from tighter monetary policies to combat inflation. Geopolitical tensions remain high. Russia on the borders of the Ukraine. China on the edge of the South China sea. China US decoupling. We monitor fifteen world hot spots with ten conflicts to watch. Rising tensions between the UK and France should not really have to figure in our International Relations Review. Growth Projections by Region ... The outlook for the two largest economies in the world largely explains the change in forecast outlook. In the U.S. Biden's build back better deal has been removed from the stimulus package. Tighter monetary policy and continued supply side shortages has resulted in a downgrade of 1.2% in US forecasts. In China, retrenchment in the real estate market and a sluggish recovery in personal consumption has led to lower growth forecast of almost 1%. Growth of 4% in America and 4.8% in China the revisions. In Europe, growth is expected to slow to 3.9% in 2023 then 2.5% next. In Germany, France and Italy growth of 3.7% is expected. In the U.K. the IMF forecasts growth of 4.7% this year and 2.3% next following a recovery of over 7% growth last year. We think the estimates are a tad pessimistic over the forecast period. For the moment our Forecast Update Remains Unchanged. You can access the UK chart set on our Flipsnack channel by clicking on the link. Don't forget, every day we undertake our "What The Papers Say Review". We check economics and business news from over twenty titles around the world. This feeds into our social media channels on Twitter, Facebook and LinkedIn. One of the many ways, we always keep you in the picture. For our "International Relations Review", we follow "Foreign Policy" "Foreign Affairs" and "Geopolitical Futures". International relations featured in our LSE training. The Cuban Missile Crisis became featured in my third year at Grammar School. Mutually Assured Destruction was the MAD option for foreign policy then as now ... That's all for this week really looking forward to Our Monday Morning Market Update next week. Markets down, Bond Yields Up, Crypto Crashes, Tech Stocks Tormented, Sterling Lower, Don't Miss that! Have a great weekend, John To understand the markets, you have to understand the economics ... Friday Forward Guidance, The Saturday Economist, Monday Morning Markets ... Forward to a Friend of Colleague, the can register for our FREE updates here. It's Only Fair To Share ! |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy. Archives
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