In Beijing the rush hour is back. Travel restrictions are being removed. Life is slowly returning to normal. No new cases have been reported on the mainland for over a week now.
The government is urging a swift return to normal. Businesses are urged to use smart technologies to accelerate the process. Over 70% of small and medium size businesses are now back in action.
Smaller businesses struggle to meet local authority regulations in place to control the virus. Distance working, within units, can pose problems, the supply of face masks is a further inhibiting factor. Remote working and smart manufacturing platforms are encouraged as part of the process. China is well set to facilitate the change.
China's cloud infrastructure has grown rapidly over the past few years. The market grew by almost 70% in the final quarter of 2019, with a value of $US 3.3 billion. Alibaba Cloud accounts for 47% of the market, followed by Tencent Cloud and Baidu's AI cloud. Despite the economic shock of the viral outbreak, the acceleration of of cloud, will be one of the beneficiaries of the change in working habits likely to result.
Despite the recovery from the viral outbreak, China faces the problem of a second economic wave as markets in the West face lock down. Output may have fallen by 10% in the first quarter. Further setbacks are expected in the second quarter. Forecasts for growth in the year have been reduced from 6.1% to 2.6% by CICC. Despite an expected bounce back in consumer spending and investment, exports may fall by as much as 20% as world demand slows.
China's recovery offers hope to the West and should be a model for recovery. As expected the Italian daily case load topped out last week. Despite the higher number reported yesterday, our momentum model suggests the downturn will continue. Spain is now reporting higher numbers but should peak within days. The UK is set to enter the "eye of the storm", the numbers will accelerate in the week ahead.
In the U.S. Trump is suggesting it could all be over by Easter. Our viral model suggests the end of May, early June, is more likely ...
Rumours of Our Deaths Greatly Exaggerated ...
The good news, rumours of our deaths are greatly exaggerated. According to the latest research from Imperial College, The lock down has been so successful, Britain is now on course for an estimated 5,700 deaths from Covid-19.
"Our work shows that social distancing is working" said Tom Pike. Neil Ferguson, Professor Pike's colleague at Imperial college, presented a model analysis suggesting the virus would kill 260,000 people, had Britain maintained a less restrictive policy. "Left unchecked altogether, the death rate could have been as high as 510,000" he added.
The 510,000 number, assumed an 80% infection rate. That's far higher than the Spanish Flu of 1918 and the experience of crew and passengers of the Diamond Princess in 2020. Both around 20% were higher than the reported infection rate in Wuhan province of around 1in1000.
So should we take comfort from the latest volte face from Imperial? Of course. Wuhan province reported just over 3,000 deaths from almost 70,000 cases in a population of 60 million people. Pro rata the UK case load would be around 90,000 with a projected loss of life of less than 5,000. The adjusted rate would be almost 1% lower as many would die of natural causes.
Bit gloomy this for a Saturday? I hope not. Numbers in the UK are set to accelerate over the next week. We expect the case load to peak within the next ten days. The viral episode should be over by the end of May. Social distancing measures should be easing by the end of April.
The virus is behaving as expected, the strike on Downing Street, just part of the process. For most businesses, the focus is on cash and survival over the next few months. As with all things, this too will pass, sooner than many expect. Then comes the sunshine and the opportunity to benefit from the strong recovery expected.
Fears of a second great depression, as with rumours of our deaths are greatly exaggerated ...
That's all for this week. Have a great, safe, week-end, wash your hands and don't talk to strangers,
Watch the numbers not the headlines, John
Thumbs up in Wuhan. The Checkpoints are taken down, travel restrictions are eased. The city hardest hit by the epidemic is slowly returning back to normal. Elsewhere in the country, other cities have been easing control measures. China has reported no new domestic cases for three days now.
The China viral episode is marked as a twelve week cycle, a perfectly "normal" pattern of viral distribution. The critical phase, the six week "quarantina" phase lasts six weeks. 95% of cases, (within two standard deviations of the norm), occur in this critical phase.
Should we be surprised by this? Not really. Quarantina is the Venetian word for forty days. Forty days was the period of isolation for new ships arriving at port in the 14th century. Michael Levitt, the British American Israeli biophysicist, predicted the epidemic would disappear from China by the end of March. The Nobel prize for chemistry was the scientist's prize in 2013. His speciality is not epidemiology nor virology. For Michael Levitt, modelling the viral epidemic is a numbers game and a pretty simple numbers game at that.
Levitt explains, "In exponential growth models, you assume that new people will be affected every day because you meet new people. But most of us meet the same people every day. You may meet new people on the bus or in public places but gradually most people will be infected or immune".
To stem the epidemic, in the absence of vaccine, the virus must be starved of victims to limit the outbreak. The government may claim we have moved from the containment phase to the delay phase but this is not correct. Home isolation and social distancing are measures to contain the virus, there can be no delay. The viral episode self extincts.
Neither can we flatten the curve. We can lower the peak of the outbreak by imposing radical social distancing measures and other "non pharmaceutical interventions". A viral spread is a mathematical function with three critical ratios, the infection rate, the reproduction ratio R(0) and the fatality rate.
Assuming an R(2) ratio, ie patient zero infects two people, then 2 people infect 4 people and so on, in a population of 100 people, the virus runs out of victims after just five steps. Then the case load falls, just as dramatically as it has risen.
In our C19 tracker we analyze the daily situation reports published by the World Health Organisation. Italy recorded over 5,000 cases yesterday. We are anxiously waiting for the tide to turn. The next few days will be critical. For Korea and Iran, along with China, it would appear the worst is over.
In the UK,. the numbers will escalate rapidly in the days ahead. Further social distancing measures may be announced. It is important to watch the data to call the move. The worst could be over by the end of April, the all clear sirens may be heard by the beginning of June ... Our people must be told there will be an end to this ...
Cometh the Hour ...
Boris Johnson shut down the pubs, restaurants and clubs this week. We were all asked to self isolate in the case of infection. People over seventy were advised to stay indoors. The government is shutting down the leisure, travel and hospitality sectors in a bold measure to protect the population.
The measures to deal with a plague or viral epidemic have not changed much since medieval times and beyond. Left untreated the economy could return to the dark ages.
Cometh the hour, Cometh the man. The Chancellor announced his bold budget on the 11th March. It all seemed so irrelevant within the week. Fears that millions of jobs could be lost, prompted the most radical intervention to stem redundancies and layoffs. Payment of wages, Cash injections, VAT holidays, Interest Free Loans, Welfare Measures, an increase in universal credit, support for renters and much more. We are set to part nationalize the airlines and airport business along with the rest of the transport sector,
The Treasury did not put a figure on the size of the bail out. The option to watch the economy lapse into free fall would have been too expensive with no prospect of a rapid recovery. Economists are forecasting recession. Borrowing is set to increase above the £160 billion in 2009/10. The bank has cut rates twice to ease the funding cost. The markets reacted by pushing up ten year gilt rates.
Where will the money come from? More QE. The Treasury will fund the deficit. The Debt Management Office will issue the debt. The Bank of England will buy the debt, underwritten by the Treasury. The interest payments will be returned to the Treasury. They are guaranteeing the debt after all.
So we are stuck on planet ZIRP with a plague on our financial houses. We cannot predict the impact on markets and economies until we have marked the path of the C19 virus. We will publish our regular C10 tracker updates, watch this space.
We plan a series of webinars at the end of April. For the moment, stay safe, wash those hands and watch the data. Above all stay in touch.
That's all for this week. Have a great, safe, week-end.
Turning the tide in 12 weeks, is this what the Prime Minister is talking about ...
1 The "China syndrome" offers a classic viral "model".
2 We can assign a “90 day window” for the episode.
3 95% of the cases (2 standard deviations) occur in the critical six week window. 40 days to be exact. This is the old Venetian 14th Century “Quarantina” period for foreign ship isolation.
4 Europe is tracking the China Syndrome at the moment. (We really need to see the turn in Italian data in the next few days to confirm the hypothesis.
5 Our guidelines are … (Base case and Best Case Scenario)
5.1 Plan for a 90 day window. The UK is tracking two weeks behind Italy and one week behind Germany.
5.2 We are now (UK) in the “Quarantina" Peak Period. There will be dramatic increases in infections in the next two weeks.
5.3 We could see “Mandatory House Confinement” shortly in parts of the UK.
5.4 The critical phase could be drawing to a close by the end of April. (Possible end of MHC).
5.5 The return to normal could begin towards the end of May.
Let's hope this is how things work out. Stay safe, Wash those hands,
The Saturday Economist ... we always keep you in the picture
Flatten your sombreros and wait for the sunshine, appears to be the key advice from Government in the midst of the Coronavirus crisis. The government model assumes a 60% infection rate is necessary to guarantee herd immunity.
With a population of 67 million, 40 million will be infected. Three million critical cases, will overload the 160,000 NHS beds available. With a 1% fatality rate, the death carts will be rolling down the streets of Britain. The cry of "Bring out Your Dead" would lead to 400,000 bodies, piled into emergency graves around the country.
Boris Johnson warned this week, we should prepare to lose more of our loved ones. Some thought this was a hint of another cabinet reshuffle, others the Number Ten Dog, called Dilyn was to be returned to the dogs home. It's a Jack Russell Cross, apparently, well, it certainly wasn't very pleased. It was left to the PM's fiancée, Carrie Symonds to assure dog lovers everywhere, the mutt was staying put.
To avoid a crisis in the health service, the government plan is to flatten the curve. We are moving from the "contain" phase to the "delay phase". The "contain" phase obviously didn't go to well, not much hope for the delay phase either. Hope is for the sunshine and UV rays to inhibit or kill the virus as the warm weather arrives.
So what can we really expect? The evidence from China suggests the covid-19 epidemic operates within a six week cycle. 40 days is the classic viral curve. The word "quarantine" is derived from the Italian "Quarantina", "Quaranta Giorni", or forty days. In the 14th century, ships arriving in Venice, were required to sit at anchor for 40 days before disembarking. The Venetians had learned from experience.
So much for flattening the curve. Statistically the reproduction ratio R(0) of the virus is 2.3. Within 21 basic steps, the virus will impact a population of 90 million.
In China just 11 new cases were reported yesterday. In Hubei province, a population of some 59 million, a total of 68,000 cases have been reported and 3,062 deaths have been recorded. The infection rate is just over 1.1% of the population. The mortality rate is 4.5%. The adjusted mortality rate is 3.7%.
In Korea, 250,000 people have been tested. In a population of 51 million, just 8,000 cases have been identified. 66 deaths have been reported. The mortality rate is 0.8%.
In the U.K. so far 1,144, cases have been reported, with 21 deaths recorded. Worse is yet to come, assuming the China syndrome unfolds. The number of cases in the UK could rise to over 75,000 with 3,500 deaths involved. For many this will be a great discomfort and tragedy. For the UK as a whole, Government reports of our potential deaths appear to be greatly exaggerated ...
President Xi visits Wuhan ...
In China, President Xi made a visit to Wuhan. The emergency hospitals built in just ten days, have closed, the epidemic appears to have passed.
Hailing "Victory to Wuhan" and saluting the people as "heroes", the President used his first trip to the province since the outbreak, to signal that China had turned the tide in the battle against the deadly disease.
The message to the domestic audience is the "Rampant Epidemic" has now been brought under control. This has been possible, only under the leadership of people's hero Xi. "It is time for businesses and factories to return to normal" and for the country to refocus on economic growth.
Foxconn founder Terry Gou, reported this week, supplies to plants in China and Vietnam have returned to normal. Resumption of production in mainland China, had exceeded expectations following the disruption from the coronavirus outbreak. The company warned revenue would drop by 15% in the first quarter. Output will return to normal but fears persist for the level of demand in China in the short term and sales in Europe and North America into the summer months.
For good measure the Chinese government confirmed plans to build 215 new airports over the next fifteen years. Fourteen new airports each year will be built. China's aviation industry will become a key part of the economy of the soon to be largest economy in the world.
In the US the President's statements on the outbreak merely added to the confusion and chaos. The National Guard were called into New York. A National Emergency was declared, merely adding to the growing sense of panic.
That's all for this edition. We will be back with more news and analysis, as we look at the impact of the budgets and market developments over the past week.
Stock markets came under further pressure this week. European stocks closed lower. The FTSE ended the week at 6,463, the lowest level since June 2016.
In the US, markets fared better. The Dow closed up on the week 250 points at 25,400. The S&P and NASDAQ held firm. Sentiment had been badly hit by reduced forecasts for world growth from the OECD and the IMF.
The Coronavirus could "halve global growth", according to the Organisation for Economic Growth and Development. "Covid-19 presents the greatest danger to the world economy since the financial crisis of 2008" it said.
The IMF warned the spread of the disease would push growth below the levels of last year. The IMF is to offer a $50 billion dollar emergency fund for countries hit by the virus.
In the OECD's base case scenario, a short lived outbreak, would suggest global growth would slow to 2.4% this year from a previous estimate of 2.9%. In China, growth is expected to fall to 5% this year, from 6.1% last year. Eurozone growth could fall below 1%, a similar scenario, would develop in the UK.
A longer lasting and more intensive outbreak, spreading through Asia-Pacific, Europe and North America could cut growth to 1.5%, the OECD claimed. So what's the outlook ...?
The number of cases of Coronavirus is set to hit over 100,000 this weekend. The good news ... data from the World Health Organisation suggests the crisis has passed in China. The number of cases has dropped to 140 per day compared to 4,000 at peak. The data suggests a 12 - 13 week cycle for the outbreak with a 1% infection rate and a 3.7% adjusted mortality rate. [See our "Say Goodbye to the God of Plague" Chart Update below]
60 million people in the Hubei confined zone presented 68,000 cases and resulted in just over 3,000 deaths. The adjusted mortality rate is less than 4%. Higher than flu perhaps but with a much lower infection rate per 000 of population.
Cases outside of China are highest in South Korea, Italy and Iran. The next week's data will be critical in determining the pattern of expansion. In China, the economy is slowly returning to normal, assuming no secondary wave appears.
In the UK we are moving into the "delay phase". If only we could move winter flu into the warmer summer months. Advice appears to be wash your hands regularly and rinse your mouth with alcohol, preferably vodka. "Nothing to fear but fear itself" was Roosevelt's warning ahead of the Great Recession. Analysis of the data from China would help ...
Fed Slashes Rates ...
In the US the Fed slashed rates by 50 basis points this week. The move planned to ease the crisis in the U.S.A. With just 150 cases reported by the weekend, the Central Bank appears to be moving well ahead of the curve.
Pressure from the White House may have pushed the move. The President was urging action to cut rates in view of the threat of Covid-19. The "Democratic Hoax" Trump claims, assisted his monetary agenda.
For Trump, The 50 basis points is not enough. A further cut would be preferable as zero or negative rates loom. US ten year bond yields fell to 0.7%. Life on Planet ZIRP just became a little weirder.
"The Fed is panicking", claimed Bond King Jeffrey Gundlach. "Once the Fed does a panic cut between meetings, a further cut is likely to follow". "Short rates are headed to zero with a further cut now possible when the Fed meets later this month" the claim.
And yet it was all going so well. The American economy was accelerating, at least since the outbreak began to spook markets. Non farm payrolls increased by 273,000 in February. The number was well ahead of the 175,000 expected. The data for previous months was revised up, bringing the three month average to 254,000 jobs.
The unemployment rate fell to 3.5%. Earnings increased by 3%. The U.S. economy is set to grow by over 2% this year. It is a strange time to slash base rates and push long rates lower.
Markets are unconvinced by the move. Traders have little faith in the ability of central banks to protect economies from disruption. No wonder as travel plans are hit and consumers ease back on spending. The travel and leisure sectors badly hit.
Uncertainty on how far the coronavirus will spread and the impact it will have on the economy is pushing the move away from equities. Gold prices moved higher closing at $1,667. Oil prices Brent Crude moved lower, closing below $46 dollars per barrel. Hand Gel prices on Amazon have reached an all time high ...
Economic Data Bounces ...
In the U.K., the latest PMI data suggests manufacturing activity is increasing, despite some concerns about supply chain disruption.
Construction activity increased in February. The composite index jumped to 52.6 in February compared to 48.4 prior month.
Renewed momentum in the housing market, has led to an increase in housing starts. Companies reported the strongest rise in new orders since December 2015.
The service sector recorded a further increase in business activity in February, albeit down slightly from the high levels recorded prior month. The rate of expansion slowed as the shadow of the coronavirus loomed. Bookings and delays to new projects in Asia featured in the slow down apparently.
Business confidence remains high. Political uncertainty has been eliminated for now. Brexit challenges remain. Problems with recruitment and immigration will persist.
It will be interesting to see what the new Chancellor has in the Red Box next week. Delays to infrastructure spending may well feature ... as the fears for the economy develop.
That's all for this week, have a great weekend. We will be back with more news and updates next week.
The number of cases of Corona virus increased to 83,652 yesterday. The increase day on day was 1,352. The China case load increased by just 331. The number of cases in the rest of the world increased by 1,027.
Barring a herald wave, China appears to be saying goodbye to the "God of Plague". As in Mao Zedong's poem in 1958 ...
"The Spring wind blows amid profuse willow wands, we ask the God of Plague, where are you bound?"
Japan, Korea and Northern Italy appears to be the answer. The greatest case acceleration is in Korea and Italy. In the UK plans are under preparation to allow schools to increase class sizes and to use Hyde Park as a morgue. With just 16 cases reported to date, the preparations may appear to be just a little premature. The mortality rate, using the data within China, appears to be around 3.5%. Mass burials in London are unlikely any time soon.
Markets experienced a greater slaughter this week. The Dow was down by 3,500 points, almost 12%. The NASDAQ and S&P fell by 10% and 11% respectively. It was a similar story in Europe. Leading indices in the UK, France and Germany were off by almost 12% in total.
In the East markets were more sanguine. Chinese equities, were up slightly in the month and Hong Kong stocks held firm. Commodity prices including Gold, Copper and Oil came under pressure. Sterling closed lower against the Dollar and the Euro.
So what happens next? My reading this week, included a revisit to Galbraith's "Great Crash of 1929" and Laura Spinneys "The Pale Rider: The Spanish Flu of 1918 and How it Changed the World". The Spanish Flu claimed over 50 million lives. The Great Crash led to the Great Depression of the 1930s.
We ask of the markets "Where are you bound"? Some consolidation was expected following the bull run last year. NASDAQ appears to be still a little over extended. This is no great crash, and Covid-19 is not the Spanish Flu. The outbreak will bring tragedy to some families and this is to be regretted.
Containment of 60 million people in China confined the infection to just 0.125% of the population. Fears of a mass outbreak in the UK with a population of 67 million would appear to be wide of the mark.
Data from the World Health Organization Daily Situation Reports. My thanks to Laura Spinney and The New Statesman for the reference to the God of Plague.
Cummings and Goings ...
Sajid Javid delivered his resignation speech from the back benches this week. The plan to merge the advisory teams within Number Ten and Number Eleven were not in the national interest he claimed.
The requirement for the Treasury teams to speak truth unto power would be undermined by the move. Ministers should have the right to appoint their own team of special advisors he stated.
"It has always been the case, that advisers advise, ministers decide and ministers decide on their advisers."
Javid found the terms of continuance unacceptable. In his resignation letter he had told the Prime Minister, "it is important as leaders, to have trusted teams that reflect character and integrity". This was a veiled hint at the perceived shortcomings of Dominic Cummings.
Javid will forever be known as the CHINO chancellor who never had the chance to deliver a budget. This week, he made some headway, challenging his successor to stick within the fiscal rules but also to cut taxes. His own plan would have been to cut income tax by 2p in the Pound, reduce stamp duty and to introduce generous reliefs for capital investment.
In a clear message, "A huge signal for working people that government was on their side" Javid explained, he intended to reduce the basic rate of income tax from 20% to 18% and to set an ambition to cut it to 15% by the end of parliament.
The cuts costing some £10 billion a year, rising to £25 billion within five years would be added to the additional £100 billion of current spending already announced by the Prime Minister and the further plans for an additional £100 billion of fixed capital investment on infrastructure.
"I very much hope the new Chancellor will be given space to do his job without fear or favour and I know my right honourable friend for Richmond (Rishi Sunak) is more than capable of rising to the challenge".
He obviously felt the new Chancellor of the Exchequer needed a little help along the way. This year borrowing is set to increase to around £44 billion. The IFS has warned the increase in the next financial year will be almost £60 billion.
The revision to tax and spending plans will call for greater creativity in defining as set of fiscal rules to accommodate profligacy and prudence. It remains to be seen if Rishi Sunak is truly capable of rising to the challenge ...
That's all for this week, have a great weekend. We will be back with more news and updates next week.
The Home Secretary outlined the new Tory immigration policy this week. In the biggest change to immigration since William stepped off the boat in Hastings, Priti Patel was in no mood to pull punches.
"Today is a historic moment for the whole of the country. We are ending free movement, taking back control of our borders and delivering on the people's priorities by introducing a new UK points-based system which will bring immigration numbers down."
EU and non EU citizens will be treated equally. High skilled workers like scientists, academics and engineers will be prioritized. Skilled workers will be allowed in under a points system with points awarded for language, education and a job offer above a salary floor of £25,600.
Fruit pickers and other seasonal farm workers will be accommodated. Farmers will be allowed to recruit 10,000 low skilled workers from outside the EU to harvest, flowers, fruit and vegetables. Farm workers from Eastern Europe will have to pick their own fruit from now on.
Not everyone was convinced by the change in policy. Fears of recruitment problems in construction and care came to the fore. Carolyn Fairbairn, Director General of the CBI, warned against the ending of low skilled immigration. "In some sectors, firms will be left wondering how they will recruit the people needed to run their business".
Health and health care were immediate cause for concern. "The proposals would negatively impact the sector and will not meet the health and care needs of the population" said Dame Donna Kinnair, the Chief Executive of the Royal College of Nursing.
This week, the ONS announced a further fall in unemployment and a rise in vacancies. With 1.3 million out of work, a rate of 3.8%, unemployment is at a 45 year low. The employment rate has never been higher. The number of vacancies in the economy increased to over 800,000.
8.5 million are inactive and could be put to work given the right encouragement and training by business according to Patel. That sounds an awful lot of resource. Unfortunately for the Home Secretary, 2.3 million are students, 1.9 million are looking after family or home, over 1.1 million are retired and 2.1 million have long term illness.
"Rise, take up thy sick bed and work" is the Patel Patois. The good news, 1.9 million of the economically active want a job allegedly. The just don't like the look of the 800,000 vacancies currently on offer apparently ...
Budget Nears ... Deficits Increase ...
Rushi Sunak is on the case. The budget will take place on the 11th March. An end to austerity and a boost to infrastructure problems will create both a financial challenge and an intellectual challenge.
More doctors, nurses and police on the streets will boost current spending. Big commitments to infrastructure will place greater demands on longer term capital spending.
The intellectual challenge will be to cobble together a set of "fiscal rules" which will present some semblance of order. The financial challenge, there really is not much money to play with and not much appetite for tax hikes at this stage of government.
The latest data on government borrowing was somewhat disappointing. In the ten months to January 2020, borrowing was almost £45 billion compared to £39 billion last year. For the year as a whole, borrowing is expected to increase to £44 billion compared to £38.4 billion last year.
Total debt increased to £2.1 trillion if the Bank of England obligations are taken into account. It would appear the Chancellor is not well placed to meet the £150 billion bill for infrastructure spending. On the other hand, life on Planet ZIRP is incredibly accommodating for profligate spenders. Ten year gilt yields fell to 0.56% this week.
A thirty year Sterling Infrastructure Bond could hit the streets with a 1% coupon. The market has appetite for debt, the Chancellor must have the ambition to exploit. £150 billion should be the ambition, more than enough to finance the refurbishment in the open plan accommodation between Number Ten and Eleven ...
China ... Inflation on the rise ...
Inflation CPI basis increased to a six month high this week. Despite the strength of Sterling and the weakness of oil prices, CPI inflation increased to 1.8% from 1.3% last month.
Service sector inflation increased to 2.3%. Goods inflation increased to 1.3% from 0.6%, providing the major boost to prices.
Producer prices remained subdued. We expect inflation to move to the target rate of 2% through the year. Relatively low inflation and a strong jobs market suggests the new Governor of the Bank of England will not face any tough decisions on rates this year.
The latest retail figures for January were pretty dismal, despite the headlines to the contrary. On the other hand, the latest PMI Markit Composite index suggested a significant boost to manufacturing and service sector activity in January.
With a positive budget outcome next month, we expect growth to average 1.3% to 1.5% compared to 1.4% last year. Many difficult challenges remain to resolve the trade deal with Europe and to determine the strategy for many sectors including fishing and agriculture.
It continues to appear as if Cabinet members are trying to earn their lines in a script that has yet to be written. Let's hope not too many continue the process of ad libbing ...
That's all for this week, have a great weekend. We will be back with more news and updates next week.
Boris Johnson confirmed this week, the High Speed Rail network would be built in full. The 330 mile Y shaped network will connect London, Birmingham, Manchester, Leeds and Wigan.
Plans were also outlined plans for "High Speed North". The East West link across the Pennines will connect Liverpool, Manchester, Leeds and Hull. The Northern network would be extended to Carlise and Newcastle.
The HS2 costs would be closely monitored by cabinet. Grant Shapps, transport secretary, promised the whole of government would be involved in ensuring the project ran on budget. "Just like the Olympics"
A bridge across the Irish Sea is to be evaluated. Cycle tracks in the air are under review across London. 4,000 carbon neutral buses are to be added to the transport fleet. The project costs could total £150 billion in total.
For Sajid Javid it was all too much. The Chancellor resigned just four weeks before his maiden budget. "Boris Johnson had attached conditions to the role which "no self respecting minister would accept" he explained in his resignation letter.
All Treasury SPADs will be sacked. Partition walls between Number Ten and Eleven were to be knocked down. The Treasury was to be brought more directly under Prime Ministerial control.
Rishi Sunak was appointed to the job. Dubbed as the "Maharajah of the Yorkshire Dales" the fast rising Tory star is ex Goldman Sachs and is married to the daughter of the Infosys Tech billionaire, Narayana Murthy. A more flexible approach to "spending rules" from Treasury is now expected.
Fed warns on debt and spending ...
Spending was very much on the mind of Jerome Powell this week. The Chairman of the Federal Reserve warned Congress on Tuesday, of the dangers presented by rising U.S. debt and deficit.
Now would be a good time to begin to reduce the level of deficit the Chairman explained, putting the economy on a sustainable path for the future.
The deficit is set to exceed the $ one trillion dollar level this year. The Congressional Budget Office has warned deficits will average over $1.3 trillion in the years ahead. The deficit has already increased by $3 trillion dollars since Trump has been in office. A further $5 trillion will be added based on current plans and budgets. There are no plans to eliminate the deficit over the next ten years according to briefing documents.
It was a week of set backs and challenges for the President. The Senate voted to limit Trump's authority to wage war with Iran. A judge ordered all work on the Jedi project should be halted, pending a review of the Amazon claim of Presidential prejudice. The Department of Defense contract had been awarded to Microsoft. Trump hates Jeff Bezos and the Washington Post.
The President was accused of another quid pro quo in his dealings with New York. Attorney General William Barr complained "His tweets make it impossible to do my job". Trump attacked former Chief Of Staff John Kelly. John Bolton, former national security adviser, sprang to Kelly's defense.
Trump's nominee to the Federal Reserve Judy Shelton faces rejection by the senate. Trump admitted sending Giuliani to Ukraine, a claim he denied through the impeachment process.
A glimmer of hope for the President? U.S. troops will be leaving Afghanistan. A deal with the Taliban has been outlined. If the Taliban can stop killing people for a few weeks, the U.S. will begin to pull out military personnel from the country. This will "Open the way for the Afghan government and the Taliban to negotiate the future of the nation" ... Ah yes, peace in our time ... sort of ...
China ... Inflation on the rise ...
Chinese Inflation increased to the highest level in eight years in January. The consumer price index increased by 5.4% in the month. It was the highest level since October 2011.
Food prices increased by over 20%. Pork prices jumped by 114%. Pig stocks have halved over the last two years as the country has grappled with an outbreak of African swine fever.
The Coronavirus continues to weigh on the economy. It is thought that economic growth could slow to 4.5% in the first half of the year, as the country grapples with the viral outbreak.
Evidence continues to suggest the outbreak may have peaked. The number of new cases reported has fallen to around 2,000 per day by the end of last week. The World Health Organization reports some 49,000 cases to date. The mortality rate is approximately 2.8%.
A return to work is now encouraged. The impact of the outbreak is extensive. This week JCB warned of production cutbacks as a result of part shortages. Economists will be scouring the data releases over the next few weeks for further information on the extent of the economic slowdown.
"Boris Bounce Helps the High Street" the headlines in the Times this week. The BDO Retail Tracker reported like for like sales up by almost 6% in January. It was the biggest increase in six years. Consumers are feeling more confident about the future of the economy, under the Johnson administration, apparently.
The housing market is showing signs of life. House prices were up by 4% in January, according to the latest Halifax data. December mortgage approvals increased by 4.6% year on year. Housing transactions were up by 7% in the month. The BDO data revealed sales of sofas and furniture increased by 9% in January. Feet up and watch the TV for further news on Brexit the guideline. On the look out for policy gaffes, the comedy option, as new ministers move into office.
The service sector enjoyed a solid recovery in January according to the latest PMI data. New orders, more employment and continued business activity pushed the index up almost four points to 53.9 from 50.0 last month. A combination of greater consumer confidence and business confidence had translated into rising client demand. It was the first indication of growth in five months. Positive expectations for the year ahead, continued to improve.
Respondents noted the "headwind" from delayed decision making had lifted since the general election. No fears of a Labour government with a radical agenda. No hung parliament and further legislative indecision. No concerns about Boris Johnson, dead in a ditch. A clear deadline for Brexit declared.
The surge in activity will settle in the months ahead. Growth for the year is expected to be around 1.3% with continued growth in jobs and earnings. Much is awaited in the March budget. Policy clarification is required on the ask for trade deals with the EU and U.S. An understanding of immigration policy would help. Bold statements on the greening of the economy would be better made in co-operation with the manufacturing sector, especially in the car industry.
New ministers appear to be learning their lines in a script which has yet to be written. The Home Secretary has vowed to clamp down on counter terrorism. The Chancellor has promised no alignment with the EU or any other country for that matter. Truly global Great Britain will not be bound by instructions from others.
The Tory government has a great opportunity to capitalize on the strong platform in Parliament. A series of sensible policy proposals developed in conjunction with, not isolation of, all stakeholders would help. Putting cabinet on tour will achieve nothing but road noise. A show boat on the Thames would be just as effective and greener ...
Trump Acquitted ... Pelosi lets Rip ...
The President was acquitted this week, retribution was swift to follow. Never one to hold a grudge when you can throw it, Gordon Sondland, the U.S. Ambassador to the E.U. was recalled from Brussels. Colonel Alexander Vindman and his brother were removed from the White House.
Trump is punishing witnesses who testified against him in the impeachment process. More firings are probable. The President will exact retribution on perceived enemies. It is a long list.
For Gordon Sondland it has been an expensive departure. The U.S. ambassador donated $1 million to Trump's inaugural committee. A hasty recall to Washington seems indecent. At least he wasn't routed via the Saudi Consulate in Istanbul.
The President delivered the State of the Union address this week. Nancy Pelosi let rip. Listening to Trump was all too much. The Speaker of the House ripped up a copy of Trump's speech in a premeditated action. He had refused to shake hands after all.
Trump's delivery had the fact checkers working over time as usual. The President claimed the U.S. economy is "roaring" and moving forward at an unimaginable pace. "Jobs are booming, incomes are soaring, poverty is plummeting, our economy is the best it has ever been". It is the "Great American Comeback" and it is all down to me, the claim.
A fiscal stimulus worth some 10% of GDP fueled the expansion. Accelerating and deficit the price to pay. In January the expansion continued as 225,000 jobs were added to the payroll. Earnings increased by 3.1% . Yet Trump's tariff and trade policy is damaging growth. The U.S. is now experiencing "cascading protection", as tariffs are extended on steel and aluminum products including nails, car bumpers and beer kegs to protect domestic manufacturing.
This week, Steve Mnuchin, Secretary of the Treasury, was forced to admit the U.S. economy would fail to meet his 3% growth target this year. In an interview with Fox Business Network, Mnuchin explained officials are reducing forecasts for the year by 50 basis points or more.
Boeing was to blame. "Boeing has had a big impact on our exports", Mnuchin said. Boeing bad, Tesla good, the President claimed. More tax cuts are planned to ensure the President is returned in November.
Fears Grow of Global Slowdown ...
The World Health organization confirmed yesterday the number of cases of coronavirus had increased to almost 32,000. The number of deaths had increased to 638. For the moment the mortality rate appears to the around 2%, significantly lower than the SARS rate of 10%.
Fears are mounting of a global slow down as a result of the epidemic. Commodity prices including oil, gas, iron ore and copper have fallen sharply since the outbreak began. China is the dominant consumer of commodities accounting for 50% of copper consumption. Oil consumption in China has dropped by 20%.
China's factories and transport networks have been shut down to contain the outbreak. Fears are growing of product and component shortages around the world. Chrysler warned of a shut down in Europe. Sony and Nintendo warned of unavoidable delays.
Burberry scrapped it's profit forecast for the year. Sales in China have slumped. The company has shuttered 24 of 64 stores. Those remaining open have experienced a 70% to 80% drop in revenue. Tourism will take a hit. Cathay Pacific urged staff to take a three week unpaid holiday to cut costs.
Chinese officials have suggested growth could be hit by one percentage point in the first quarter. Oxford Economics believe China's GDP could fall from 6% to 4%, with a possible impact on global growth of 0.25%. The forecasts assume the outbreak will be contained within a three month period with a six month duration in total. Thereafter the bounce back will be swift and significant with any losses to output recovered in the year as a whole. As with all crises, this too will pass ... we can but hope so ...
That's all for this week, have a great weekend. We will be back with more news and updates next week.
And so it came to pass, the U.K. has finally left the EU. We should have parted ways at midnight last night, but with a final twist of Brussels irony, we were forced to leave an hour earlier due to European regulations. Just a taste of things to come perhaps.
According to the Telegraph today, Boris Johnson is ramping up the pressure on the EU. The Prime Minister is preparing to impose full customs and border checks on all European goods entering the UK. Comprehensive checks on EU imports will be imposed by the new administration. Excellent.
No thought of the delays on deliveries, nor the threats to just in time manufacturing. Empty shelves in supermarkets, a result of empty thinking in cabinet. No thought of retaliatory measures from our friends across the channel. The French will play catch all in Calais and the Spanish will hold all traffic moving across the border into Gibraltar. If this is setting the tone for negotiations with Brussels, there is little or no chance of a trade agreement before the end of the year.
The Bank of England held rates at the MPC meeting this week. It was Mark Carney's last call. The unreliable boyfriend is off, to be replaced by Andrew Bailey, a bank stalwart. Despite market sentiment, foreseeing a cut in rates, this was never really an option. The Bank is worried about the implications of Brexit on growth and trade.
Forecasts for the UK have been slashed this year to just 0.8%, with a more promising 1.4% growth in prospect for next year. No Boris bounce envisaged by Threadneedle Street. No widespread evidence of a pick-up in growth. A renewal of trade tensions could damage growth. The challenge of Brexit will persist.
The Governor hinted the next move for rates would be up, if growth developed in line with forecasts. "Things are gradual if they are multiple, things are modest if they are not" Carney explained. So much for forward guidance, with one bound he was off ... "When the seagulls follow the trawler, it is because fiscal prudence will be thrown into the sea" would have been my more favoured parting shot ...
Fed Holds Rates ... U.S. growth slows ...
The Fed also held rates this week providing no real shock to markets. The President would like rates slashed to negative and beyond. The "Boneheads At The Bank" are unlikely to oblige.
Officials are monitoring a number of risks including a renewal of trade tensions and the threat of the coronavirus outbreak in China. Any mention of a "very stable genius" in the White House with "unstable economic policies" was omitted.
"We expect moderate economic growth to continue" Fed Chair Jerome Powell told reporters Wednesday "but uncertainties about the outlook remain, including those posed by the new coronavirus".
The Fed funds rate remains in a range between 1.5% and 1.75% following three cuts last year, from a high of 2.5%. Further changes in rates are not expected this year as the Fed assesses the implications of a soaring fiscal deficit, with further tax cuts on the cards from the Trump administration.
The latest data confirms the U.S. economy expanded by 2.3% in 2019 with a slowdown in the final quarter from 2.7% at start of year. Household spending is supporting growth (up by 2.6%) but business investment came under pressure in the second half of the year. Private sector investment, up by 5% in the first quarter actually fell in the final quarter by almost 2% year on year.
Business investment is under pressure. The manufacturing sector was in recession last year. Capital spending actually fell in 2019. Trade and tariff policies clashed with tax cuts, as Gary Cohn, former director of the National Economic Council and Chief Economic Advisor to President Trump explained last week.
Growth in the U.S. is expected to slow to around 2% this year. The fiscal deficit will rise beyond $1 trillion dollars, with no relief for the trade deficit, as consumer spending continues. The Senate will vote to acquit Trump this week. No need for witnesses, the breaches of protocol are evident. Abuse of power and obstruction of Congress admitted. Senators condemned to drink nothing but water or milk during the impeachment process are eager to provide a swift response.
"Let the people decide" Trump's White House counsel said this week. They will get their chance in November, a Trump dynasty awaits the verdict ...
High Speed Rail Goes Ahead ...
China announced ten new infrastructure projects this week. The schedule includes four new high speed rail projects, covering some 2,000 kilometers. The rail links will be completed in the next four years, at a cost of $50 billion dollars. The extensions will be added to the 35,000 kilometer network already in existence.
Next year, China will trial the MagDev rail project with speeds of up to 500 kilometers per hour possible. That's fast!. The emergency hospital in Wuhan, to treat coronavirus patients will be completed in four weeks. That's also fast.
Next week we will assess the economic implications of the viral outbreak. The World Health Organization has defined the outbreak as a "Global Health Emergency". 10,000 cases have now been identified in China. More hospitals may well be needed in due course. In due course they will be built at speed.
For the moment we return to the pressures on the Johnson administration to make a decision on HS2. The government made the right call on Huawei last week. The U.S. is falling behind in the 5G race. It has long abandoned any move to High Speed Rail.
The Prime Minister is in favor of HS2 allegedly, a decision is expected soon. The issue is one of capacity rather than speed. The decision more pressing now the "Smart Motorway" Aporia has been revealed. Road congestion will place freight traffic under greater pressure if not. It is time to make the call if real productivity gains are to be secured ...
That's all for this week, have a great weekend. We will be back with more news and updates next week.
The Saturday Economist
John Ashcroft publishes the Saturday Economist. Join the mailing list for FREE weekly updates on the UK and World Economy.
The material is based upon information which we consider to be reliable but we do not represent that it is accurate or complete and it should not be relied upon as such. We accept no liability for errors, or omissions of opinion or fact. In particular, no reliance should be placed on the comments on trends in financial markets. The presentation should not be construed as the giving of investment advice.