 Good news for the Chancellor this week. Borrowing fell once again in July, compared to prior year. In the month, the surplus was £2 billion compared to £1 billion in 2017. The year to date comparisons were even more impressive. In the first four months of the financial year, borrowing was just £12.8 billion compared to £21.3 billion last year.
VAT receipts were up by 6%, Income tax and capital gains tax receipts were up by 6%. Interest payments were down by some £2 billion. Interest receipts under the "money for nothing, gilts for free" programme [QE] were up by £2 billion. Spending was up by less than 1% as the austerity policy continued. Social security payments were up by almost 3%. Extrapolate the four months trend over the year as a whole and borrowing could fall to £24 billion this year, compared to £39.4 billion last year. This is unlikely. Last month we revised our forecast for the current year borrowing to £30 billion. This remains a fair forecast for the moment. Retail sales in the first four months were up by 4% in value terms. Jobs growth was up by 1%. The average earnings spread was 2.5%. The underlying numbers suggest receipts were flattered in the year to date. The momentum of lower borrowing may slow over the rest of the year. The Chancellor warned this week, borrowing may rise by some £80 billion over the next decade. If hard Brexit becomes the reality, slower growth and rising unemployment will over shadow the outlook for truly global Britain. Should we really be worried about Brexit ...? Your sandwiches safe in my hands ... Dominic Raab provided an assurance this week, there would be no sandwich crisis in the event of a hard Brexit. "So let me reassure you all that, contrary to one of the wilder claims, you will still be able to enjoy a BLT after Brexit. There are no plans to deploy the army to maintain food supplies." Stories had been circulating in Westminster, the government planned a three month stock pile of "Bacon, Lettuce and Tomato" sandwiches delivered to Sainsbury's by the SAS if need in the event of a food crisis. With 10,000 lorries per day delivering food from the EU to the UK some concern was inevitable. Dominic Rabb, Secretary of State for Exiting the EU had the thankless job of addressing concerns about a hard Brexit. The Government released this week the first batch of "What would happen under a hard Brexit" papers. Twenty Five of a planned eighty two in fact. It made for some difficult reading. It now seems clear in the event of a hard Brexit, we will lose all control of regulation and product standards. Business will be tied up in the red tape and administration, we had clearly sought to avoid by leaving the EU. The Government told companies to “consider how they will submit customs declarations in the future. They should engage the services of a customs broker, freight forwarder or logistics provider to help, or alternatively secure the appropriate software and authorizations” to assist. As for standards and regulation ... The UK would take "unilateral action" to "maintain as much continuity as possible". "We will accept the testing and safety approvals of existing medicines if they're carried out by an EU member state". We will hope the EU would do the same for us. The UK will unilaterally recognise EU food standards and pursue equivalency arrangements on food regulation. We hope the EU will do the same for us. Defra minister George Eustice told a Lords committee his department would implement a 'mutual recognition' regime, which amounts to assuming food from the EU was safe to eat, hoping they will do the same for us. Really? Transport secretary Chris Grayling told the BBC in March that "we will not impose checks" at the port of Dover. Let 'em drive through with illegal immigrants clinging to the differential axis presumably. In further bad news, UK expats were warned they may not be able to access pension payments or bank accounts for that matter in EU countries. Banks were advised to open offices in Dublin or along the Danube if things get tough. Car manufacturers will be advised to relocate within the customs union as a next step. "Britain : A 21st Century Exporting Superpower" Liam Fox, declared this week, Britain can become a 21st Century Exporting Superpower following Brexit. Exports can be boosted to 35% of GDP if only 400,000 businesses would begin to export or export more. It isn't really clear how things will be so much easier once out of the EU. German exports to the BRIC countries, China, India, Russia and Brazil were over four times higher than that of the UK last year. German exports to China were valued at almost $100 billion dollars compared to less than $25 billion for the UK. Exports to the USA were over twice the levels achieved by UK traders. It's all about capacity in the manufacturing sector. Capacity further inhibited outside of the customs union, especially in motor, aerospace and big pharma. The clock is ticking. The difficulties are compounding. Time is running out. Taking back control, free from red tape and regulation may not be so easy after all. Need more information on the monthly data? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data with some great charts and forecasts, you can copy and use at will ... Don't Miss Our Monday Morning Markets ... Don't forget! Monday Morning Markets is back. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. Last week our eToro "Empires of the Cloud" jumped by 1.4%. Thanks to a great performance from Square and Twitter. Our index tracker fund was positive across the board as our predicted rally in the DOW, NASDAQ and S&P materialized. Our funds are in the black, despite a continued setback on FB and Alibaba That's all for this week, we will be back next week, with more economics. and markets. Have a great weekend, John
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 The fundamentals for the Turkish economy are pretty weak. Strong growth has been secured at the expense of high inflation, a balance of payments deficit and high external dollar borrowing. With interest rates, already well into double figures, markets were calling for short interest rates to rise into the mid twenties to combat inflation and stabilize the currency.
The Trump tariffs were the trigger for collapse in the Lira. The currency fell by 20% against the Dollar last week. Contagion fears pushed markets lower in Europe and the UK. Stocks fell in China, Hong Kong and Japan as fears of trade wars increased. Emerging markets came under pressure. Currencies in Argentina, South Africa, Thailand and even India came under threat as sentiment flowed in favour of Uncle Sam and the currency of choice. It's all about the Dollar. The Fed plans further rate hikes this year on the back of strong growth and rising inflation. The impact of the tariffs were slightly irrelevant. Turkey exports just $1.5 billion in metals to the USA. The geo political significance of the move was more significant. The US is prepared to move against an ally on the strength of a whim from the White House. Turkey is planning to buy the S-400 missile defence system from Moscow. Trump threatened to pull the sale of US F-35s to Turkey. Does that make sense? Not really. Trump is upset. "Turkey has taken advantage of the United States for many years." he tweeted. "They are now holding our wonderful Christian Pastor hostage. We are cutting back on Turkey!". The message to friend and foe alike is evident. Strategic partnerships do not from part of Trump diplomacy. There is no think through on actions taken. Russia interests will be strengthened in Eastern Europe. China's interests will be accelerated around the world. Membership of NATO will no longer make much sense to the buffer state. Russia and China were quick to offer support both in terms of trade and finance to Ankara. As for contagion, the real threat of spread is limited. This is not a prelude to the financial collapse of 2008, nor is it likely to be as significant as the "taper tantrum" of 2013. Emerging markets are in better shape, with lower inflation, higher foreign reserves and flexible exchange rates. With the exception of Argentina perhaps, the major problems are unique to Turkey. The Turkish economy grew by over 7% in the first half of the year. Inflation hit 16% in July. A rising balance of payments deficit funded by dollar borrowing led to a hike in risk spreads on the currency. Trump's tariffs were the catalyst for the Lira collapse not the cause. Should we be worried? Not really It is August, most traders are away on holiday. Those at their desks will delight in Turkish turmoil for now. The fundamentals remain strong for the world economy. Once the mid terms are out of the way, we expect peace to break out amongst the threat of trade wars. Making America Great Again will become the priority. It will not be achieved by punitive tariffs and sanctions often in contradiction of American interests ... Back in the UK ... Inflation increased to 2.5% CPI basis in July. Goods and Service sector inflation were unchanged at 2.6% and 2.3% respectively from prior month. The headline marker should probably have increased in June. Weaker currency and a recovery in oil prices largely to blame, we expect inflation to remain above target for the rest of the year closing around 2.4%. Producer prices increased by just 3.1% in July. Input costs on the other hand, increased by almost 11%. Oil, fuel and imported metal costs largely to blame for the hike. It's a familiar story. Rising oil prices and a currency under pressure lead to higher domestic prices and a real household income squeeze. Manufacturing margins will be inhibited as output remains flat. Manufacturing output in the second quarter was up by just 1.5%. "Manufacturing Margins Under Pressure" News from the retail sector was more upbeat. The volume of retail sales increased by 3.5% in July. The value of sales increased by almost 6%. So much for a squeeze on spending. Online sales increased by 15% now accounting for over 18% of retail sales. The squeeze on traditional retail continues, placing further pressure on high street structures. Job news was also good this week. Unemployment levels fell to 1.36 million in June. The unemployment rate fell to 4.0%. The number of vacancies increased to a record high of 828,000. Recruitment difficulties are increasing. So what happened to pay? The low pay anomaly continues. Despite the strong jobs market, whole economy earnings fell to 2.4% in June. Construction pay increased by 5%. Our "brickies" index is going through the roof! Need more information? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data with some great charts and forecasts, you can copy and use at will ... Don't Miss Our Monday Morning Markets ... Don't forget! Monday Morning Markets is back. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. Last week our "Empires of the Cloud" fund took a hit. We moved into China taking a hit on the index and our online pair of BAIDU and Alibaba. We are still in profit thanks to a great performance in Apple, Square and Twitter. Our index tracker fund shows the damage from the "Turkish Turmoil". Much red in Europe and South East Asia led to an overall loss of just over 1% in the week. We expect a big rally in the return to work phase ... coming soon! That's all for this week, we will be back next week, with more economics. and markets. Have a great weekend, John  "Economic growth rebounds as feel-good World Cup boosts growth", the headline in the Telegraph today. Let's not get too excited. Underlying UK growth in the second quarter was just 1.3% compared to 1.2% in the first. Not much of a rebound really, as we warned in The Saturday Economist last week.
We expect growth of 1.4% this year and a similar level next. The pattern over the last three months remains very much the same. Service sector growth of 1.5%, supported by strong growth in transport, storage and communications. We expect an ongoing, weak performance in production and construction. Manufacturing growth was up just 1.3%, construction increased by 0.8%. Government related services increased by just 0.2%. In spending terms, household spending, investment, and government expenditure increased by an average 1%. Domestic demand is moribund. Growth hopes are sailing away. The trade deficit increased in the second quarter, compounding the woes for the UK economy. Sam Coates writing in The Times today, suggests there is an "end of days feel in Westminster. A cry out for strong leadership". This is as true over Brexit as it is over the economy. "A sense of helplessness and drift" borne out of a lack of direction and development of policy. Fears are increasing, Britain will leave the EU without a deal. Sensing the mood, Sterling fell on Friday to $1.27 against the Dollar. It will surely test the $1.25 level this week. Sterling closed down against the Euro closing at €1.1188. The holiday season is upon us. Holiday makers will face expensive trips abroad over the next few months. Let's make a wish ... Iran, Turkey and Russia where under pressure this week. Congress announced sanctions against Russia for the nerve gas attack in Salisbury. Sanctions were announced against Iran for violations of the nuclear treaty. The President announced a doubling of tariffs on steel and aluminum imports from Turkey because, well, because he could. Aluminum imports from Turkey will face a 50% tariff on arrival in the USA. The Turkish lira plunged by 20% against the Dollar. The Russian Rouble fell by 12%. Sentiment is with the Dollar as forecasts for US growth this year are increased to over 3%. The Fed plans two more rate hikes in 2018. The problems for the Turkish economy are increasing as inflation increased to 16% in July. The Central Bank increased base rates to near 18%. Ten year bond yields jumped to 20.8%. The economy faces a crisis with fears of contagion impacting on lenders across Europe and the US. Trump tweeted "Our relations with Turkey are not good at this time". "The Turkish Lira slides down against our very strong Dollar". So true! "Our relations with Turkey are not good at this time" In other news, Trump tweeted, "The deal with Mexico is coming along nicely" "The new President has been an absolute gentleman". Enrique Peña Nieto is in. Justin Trudeau is out. "Canada will have to wait. Their tariffs and trade barriers are far too high. I will tax cars if we can't make a deal". Trudeau made the mistake of squeezing the President's hand too hard when they first met. The price must be paid, if we are to make America Great again. The trade wars with China continue to escalate, adding tension to world economies and markets. Somewhere in the Pacific a a giant shipload of soya beans circles off China. A victim of the trade war with the US. Trump unveiled a second round of tariffs on $16 billion of Chinese goods. China responded in equal measure. The Peak Pegasus is a bulk carrier with a 43,000 tonne capacity. The vessel rushed to port to unload before tariffs came in to force. Too late, the ship owned by JP Morgan Asset Management was turned away. The good news soya bean prices have jumped. Just as well. The charter costs are $12,500 dollars every day as it circles around in the Yellow Sea. Who would have thought tariffs could be such fun. Trump has discovered trade tariffs can be used just like late payments to suppliers in the construction business. No need for approval or just cause for that matter. Just a tweet and chaos ensues. The President is now on a working golf vacation. Time alone with Fox News and Twitter. White House staffers are nervous, any semblance of control now abandoned over the break ... Don't Miss Our Monday Morning Markets ... Our Monday Morning Markets is back. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. Last week our eToro "Empires of the Cloud" fund recovered. The NASDAQ moved up. We are in the black and 90% invested. Don't miss the updates. It's just for fun. That's all for this week, we will be back next week, with more economics. Need more information? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data. Have a great weekend, John  Rates up, Sterling falls, the Bank hikes UK rates to 0.75%, Markets had expected a rate rise this week. The unanimous decision to increase base rate was a surprise to many. The concerns of group think in Threadneedle Street are enhanced.
So what prompted the move this week? According to the Governor, employment is at a record high, there is limited spare capacity, real wages are picking up. Domestic inflation pressures are increasing. The prospect of excess demand is emerging. Earnings may have increased to 1.75% around the middle of this year. UK growth is estimated to have rebounded in the second quarter. An underlying trend is emerging following the weather affected performance in the first quarter. The Bank expects growth of 1.5% this year. "With domestically generated inflation building and the prospect of excess demand emerging, a modest tightening of monetary policy is now appropriate to return inflation to the 2% target and keep it there." Is this the right decision? Well probably but for the wrong reasons. Growth in the second quarter is unlikely to have accelerated much in Q2. This according to the short term GDP trackers from the ONS and NIESR. The Governor may cite a recovery in construction output in May but monthly building data is incredibly volatile and subject to revision. Danny Blanchflower has condemned the move. "Raising rates is a big mistake. The decision is made on the basis wage growth is about to skyrocket. It isn't. The decision will have to be reversed." Is it really about wages? The Bank is concerned about the rising possibility of a "no deal" Brexit and a shock to output. The Banking system is "mission ready" with adequate liquidity to absorb a Brexit setback. The Central Bank would like to be in a position to cut rates to ease pressures within the economy in the event of a Brexit shock. It has to put rates up first before it can bring them down again. It is what one might call the "Grand Old Duke of York" Strategy. "March rates up to the top of the hill and march them down again". They won't get very far up the hill before there may be a need to act! The bank is suggesting one rate rise per annum over the next decade. Rates would cap out at just over 3% by the end of the next decade. Forward guidance returns, now with a much longer perspective. The Governor's bearish statements on a hard Brexit pushed sterling to $1.29 against the Dollar before a pullback about the $1.30 floor by end of week. Jacob Rees-Mogg was unimpressed. "Mark Carney has long been the high priest of project fear. His reputation for inaccurate and politically motivated forecasting has damaged the reputation of the Bank of England". Ouch! Some Brexiteers, so tough to please ... Trade wars escalate ... Over in the USA, The White House is considering increasing the proposed tariffs on $200 billion of Chinese goods to 25% from the current 10% initially proposed. China has responded with a threat to increase tariffs on $60 billion of US imports into China. The import taxes would range from 5% to 25% applied to four categories from agriculture to metals and chemicals. Beijing has made it clear, any threat of trade wars or blackmail, will only lead to intensification of conflicts and damage to the interests of all parties. The White House has called on China to address the longstanding concerns about unfair trading practices. According to CNBC there is "Zero Engagement" between the Trump administration as the tensions rise between the two super powers. It's a stand off but who will blink first? China markets wilted this week on the threat of trade wars. The threat to growth will push China to accede to Trump demands is the theory. The political reality suggests otherwise. US business hates a trade war. The tariffs will increase inflationary pressure, lower real demand and damage profits. The White House is realigning. Trump is creating warm overtures to Europe suggesting a free trade deal across the Atlantic. A Mexican stand off is near settlement opening up the prospects of a NAFTA agreement encompassing once again a deal with Canada and the Southern state. The Republican party would like to avoid a trade war on any front. The harsh rhetoric between Beijing and Washington must continue until the mid term elections this year. Trump's base audience loves the tough talk with China. America First the claim. Trump cannot abandon the aggressive trade platform completely. His core base cannot be denied the dogma in the run up to the election. The GOP may lose control of the House in November? It could be a close call. Either way, once the votes are in, an accommodation with Beijing will be sought. The trade deficit is increasing as growth accelerates in the USA. Debt levels are rising as spending plans and tax cuts take effect. Tax cuts of $1.2 trillion and military spending increases of $800 billion will compound the underlying weakness of Trump's grand plan. A $22 trillion deficit will need the "Kindness of Strangers" to avoid a funding crisis and a run on the Dollar in the medium term. Don't Miss Our Monday Morning Markets ... In July, we launched our Monday Morning Markets. The update is released every Monday Morning at around 8:00am. We look at key stock markets, bond markets, interest rates and currencies every week and monitor trends and direction in key areas. It's just for fun. Last week our "Empires of the Cloud" fund took a bath on Facebook. Wiping out our gains for the month as a whole. This week, we backed up the Facebook position and moved in on Twitter. The Apple results boosted share prices, The NASDAQ and the DOW moved up. We are back in the black and 40% invested. Don't miss the updates. It's just for fun. Like the tennis scores. That's all for this week, we will be back next week, with more economics. Need more information? Check out the Monthly Round Up on the Saturday Economist Web Site. Here we provide more detail on monthly data. Have a great weekend, John |
The Saturday EconomistAuthorJohn Ashcroft publishes the Saturday Economist. Join the mailing list for updates on the UK and World Economy. Archives
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