World Growth is Deflating ...
Should you be planning for the next recession? This was the theme of our Quarterly Economics Presentation in association with Brabners this week. This is the event hosted in Manchester and Liverpool in which 200 slides flash by in just 40 minutes. No wonder heads spin, as we cover the world economy and the UK in some detail. The audience warmed to the cheery theme. The world is not heading for recession as we might traditionally think of such. Central banks will not be prone to act to curb excess in the economy. We normally think of excess demand leading to rampant inflation and a soaring trade deficit, or we may think of financial shocks related to irrational exuberance in equity or debt markets. Not this time, or not yet at least. There are major problems ahead for the US economy and the twin deficit dilemma in the medium term. There will be problems generated by the price bubbles created in the sovereign debt market, which will affect the Dollar and the financial markets around the world at some stage. For the moment the world economy is not facing a sudden shock to the economy. The world economy is facing an insidious slow down in growth and trade, as a result of the uncertainty generated by Trump and Tariffs, Boris and Brexit. Central banks pushing rates to the zero bound and beyond will be powerless to act. Central governments will be limited in their capacity to introduce fiscal expansion. In the US. an economy which should be growing at 3% this year, is now penciled in for growth of around 2.3%. Forecasts for growth in China, Japan, and the EU are lowered, as world trade growth slows and manufacturing output growth is damaged. India, Australia, Singapore, Taiwan all face a reduction in growth forecasts for this year and next. This week, the U.N warned of a serious of global recession. When China addressed the UN global assembly the message was stark ... "The lessons of the Great Depression should not be forgotten. Tariffs and provocations of trade disputes, which upset global industrial and supply chains, serve to undermine the multilateral trading regime and global economic and trade order. They may even plunge the world into recession." So should we be planning for the next recession? Not just yet. Future fortunes will be determined by what happens next in the White House ... Impeachment looms ... Impeachment is coming for the President. The trigger will be the telephone conversation with President Zelensky of the Ukraine. No sooner had Trump put down the receiver in the White House residence, alarm bells were ringing among the dozen or so officials monitoring the call. Officials listened in with growing dread. The President was rambling and off script. Trump asked Zelensky for a favor. A simple request to dig up some dirt on Joe Biden and family in exchange for military aid. For Trump this was neither unusual or abnormal. For others, including Nancy Pelosi, this was a clear abuse of privilege. Officials in the White House tried to "bury" the transcripts. Trump had them released and admitted he had sought some information on Biden and had suspended military aid, to pressure the President of the Ukraine into action. So what's wrong with that? The matter had come to light via a whistle blower within the camp. A CIA plant, an expert on Ukraine had revealed the content of conversations. Nancy Pelosi, the Democratic Speaker of the House was forced to act. The calls for impeachment in Congress could no longer be ignored.The impeachment process has begun. For Trump, "I had a simple and very nice call with the new President of the Ukraine, it could not have been better or more honorable. It was very legal and very good. It was a perfect conversation with Ukraine President". Of course it was. Now comes the process of diversion and confusion. The Republican surrogates have been unleashed. The Trump Twitter storm continues. Trump is cornered. Anthony "The Mooch" Scaramucci has warned in the end Trump will turn on everyone, even the American people to secure his position. At close of week, came the hints, the administration is considering a ban on dollar investments in China and a ban on US listings of Chinese companies, including Alibaba, Baidu and JD. com. Compulsory de-listing could affect over 150 companies with a combined market cap of $1.2 trillion dollars. Markets trembled on the news as the focus moves away from an innocent phone call with a President of a place far away from Washington ... UK Borrowing Plans Up in the air ... Good news for the Chancellor this week. Borrowing fell in the month August by £0.5 billion compared to prior year. Not so good really, revisions to the data added nearly £20 billion to the borrowing requirement as a result of changes to the treatment of student loans and public sector pensions. Borrowing for the year as a whole is now likely to be over £50 billion. Borrowing plans are in the air as debt is set to exceed the 2% GDP target. The spending plans for the new administration will push debt levels to over £70 billion in the short term. That's assuming Boris Johnson remains in office. The Prime Minister lost a further vote in the House this week. There will be no parliamentary recess to accommodate the Conservative party conference. Members of Parliament are miffed about prorogation and Johnson's parlance. Talk of the "Surrender Bill" and "Betrayal of the People" is not helping the Prime Minister's popularity campaign. It is unlikely a deal will be secured with the EU, the government will be obliged to ask for an extension into the New Year. A party of national unity may emerge to effect the transition. Jeremy Corbyn has indicated he would be prepared to step aside. Ken Clarke is the bookies favorite to assume the role of leader. Boris Johnson has become embroiled in a scandal of his own this week. Impeachment may well follow. There is nothing in an unwritten constitution to prevent that ... That's all for this week, have a great weekend. We will be back with more news and updates next week! John
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The Prime Minister was in Luxembourg this week. Promising to free Britain from the shackles of Europe, Johnson invoked the persona of Bruce Banner. "The Madder Hulk Gets, the Stronger Hulk Gets" explained the PM.
The prospect of a mad man in negotiations with Europe presented nothing new for EU leaders. For Boris Johnson, it's about as green as the new administration will get in pursuit of an eco friendly agenda. Sadly, the "Incredible Hulk" turned into the "Invisible Man". Johnson walked away from a planned press conference with the Grand Duchy Premier Xavier Bettel. A small but vociferous group of anti Brexit protestors was enough to put off the Hulk. "I wanted to move inside but the others would not agree", explained the PM. On such small things will the bigger issues founder. Time is ticking with no real solutions in sight. In economic news this week, inflation slowed in August to 1.7% from 2.1% prior month. Goods inflation fell to just 1.3% assisted by falls in clothing and footwear prices. Producer prices were equally muted, output prices fell to 1.6%. The Bank of England decided to hold rates this week at 0.75%. Concerns about the trade war with China and uncertainties about Brexit continue. In the event of an EU deal, the next move for U.K. rates will be up "at a gradual pace and to a limited extent". No Guts, No Vision ... In the U.S. the fed cut rates by 25 basis points this week. Despite headlines, that U.S.Indicators are trouncing forecasts. The Bloomberg Economic Surprise Index reached an 11 month high this month after four indicators released on Thursday including home sales and jobless claims surpassed expectations. The U.S. fundamentals remain strong. Uncertainty as a result of the Trump tariffs and trade wars is a cause for concern among FOMC members. Trump attacked the decision "No Guts, No Vision" the criticism. Jay Powell and the Boneheads resisted the opportunity to slash rates to zero, enabling the economy to soar like a rocket, until November 2020 at least. The President has one eye on the economic barometer and another on the poll results which are not moving higher in his favor. Seven of the ten officials voted for the cut, two opposed the move. One voted for a larger move of around 50 basis points. Either way the Fed made it clear no further reductions were expected this year. The next move for rates will be to the upside, assuming the trade war with China does not impact further on growth this year. The OECD warned this week of the impact of trade wars and tariffs on production and growth around the world. U.S. growth forecasts have been cut to 2.3% this year and 1.8% in 2020. The economy should have been expanding at 3% plus this year and next but for the havoc the Trump trade myopia presents. Headline articles in the Guardian this week included "Trump is seriously, frighteningly, dangerously unstable and the world is in danger ..." We include this in our series on The Economic Consequences of Mr Trump Chapter 1 Inside the mind of the President, it is becoming a chilling read ... Trade war enters new phase ... The trade wars entered a new phase this week. The President was under fire from whistle blower leaks. Trump had offered favors to Ukraine in exchange for dishing the dirt on Joe Biden's son. The Ukrainians were awaiting a decision on a multi million dollar aid package. Trump explained to President Volodymyr Zelensky the country could "improve it's image", if it concluded the investigation of certain corruption cases. Notably the investigation of a certain Ukraine energy tycoon. Joe Biden's son was on the board of one of his companies. Giuliani, Trump's personal lawyer, met with an aide to the Ukrainian President to thrash out the details. Asked if he had discussed Biden on his call with Zelensky in July, Trump told reporters, "It doesn't matter what I discussed, someone ought to look into Joe Biden". National security experts confirmed Trump's pressure on Ukraine was highly inappropriate. The Washington Post suggested Trump has done much to warrant impeachment but the Ukraine conversations are over the top, even for the President. Trump needed a distraction and ramped up the rhetoric with China. "Obviously, China is a threat to the world, because they are building a military faster than anybody. I view China in may different ways, but right now I am thinking about trade. And you know trade equals military." Last week trade tensions were easing, stock markets rallied. This week trade tensions increased and markets fell. Trump claimed to be in no rush to complete a deal before the election in 2020. The Chinese made note and packed up early leaving for home. A scheduled visit to the farmlands of Montana and Nebraska was abruptly cancelled. "We didn't even get to know what they wanted to discuss" said Scott Kulbeck, director of the Montana Farm Bureau. Should we be worried? Trump insisted he continues to have fond feelings for China’s leader, Xi Jinping. “My relationship with President Xi is a very amazing one, a very good one,” he said. “But we have right now a little spat.” Yep a little spat which if left unchecked could push the world into recession. When Peter Navarro, Trump's adviser on trade and manufacturing, penned "Death by China" he failed to include the Chapter on mutually assured destruction, as a result of his policy response. That's all for this week, have a great weekend. We will be back with more news and updates next week! John If you haven't done so already sign up or our Guild Messaging Group, It's FREE ... Only there can you get the latest on "The Economic Consequences of M Trump" - Chapter 1 Inside the Mind of the President, Episode 4 "The President is seriously nuts" ... Out Now ... Sterling hit a two month high this week. The Pound closed at $1.2464 against the dollar and €1.1255 against the Euro. Much work will be required if strong overhead resistance at $1.25 is to be overcome in the near term.
Markets were encouraged by the prospects of a Brexit deal secured by a Prime Minister on serious charm offensive in the North of England during the week. Johnson has picked up the Northern Powerhouse mantle, promising a train set fit for purpose and the prospects of a bridge to Northern Ireland. Once again a "Bridge Too Far", albeit secured at a fraction of the cost of HS2. The latest news on the U.K. economy presented a mixed bag. Manufacturing fell in the latest figures to July. Construction growth disappointed, as service sector growth slowed. We expect the economy to grow by 1.2% year on year in the third quarter, following growth of 1.5% in the first half of the year. The good news, unemployment continued to fall as modest growth continued. Fears of recession were pushed aside, despite the drop in the number of vacancies in the economy. The bright spot in the data was undoubtedly earnings. The genie is out of the bottle. Earnings increased by 4.2% in the month of July. Service sector earnings increased by 4.4%. Financial sector earnings were up by over 5% and construction pay rates increased by 7%. The rate of growth in earnings will limit the capacity of the Bank of England to cut rates for the rest of the year. The Prime Minister is determined to detach the UK from the EU by the end of October. The pressure is on to secure a deal which is palatable within parliament and acceptable to the Tory election base with just thirty days available to secure sign off ... A Trade War Fears Ease ... Trump shocked close advisors this week. The President announced that Martians had landed at Camp David on Monday in a search for higher intelligence. A Presidential mind probe proved disappointing. The visitors left the following day, taking National Security Adviser John Bolton with them as a peace gesture to the rest of the world. The President explained, "John had told me in the evening that he wanted to resign, I asked him to wait until morning and he was whisked away at dawn." "I know him very well. The problem with Bolton he just wanted to nuke people. I just want to write beautiful letters and invite the Taleban to barbecues at the ranch". Peace is in the air. The President is anxious to get the troops out of Afghanistan and relocate them to his luxury resort at Turnberry at the earliest opportunity. Several exploratory visits have already been made with refueling contracts secured at Prestwick. The President talks of a third term for the dynasty but really dreads a one term tag. Talks with the Taleban, sanctions eased with Tehran, a blind eye to missile launches in North Korea anything to secure the elusive Nobel peace prize. The economy is slowing at home as government borrowing soared to over $1 trillion dollars in the first eleven months of the financial year. Fears of recession are growing as prices rise and manufacturing output and investment falls. This week, the iconic U.S. tennis ball manufacturer Head Penn Sports Group complained about the indiscriminate nature of tariffs. U.S. owned Penn was established in 1910. Five years ago production was relocated to China. The company now faces a 15% tariff on imports. Penn's principal competitor is Wilson. The company is owned by a Chinese consortium which manufactures in Thailand. The Chinese owned Wilson escapes the punitive Trump tariff and secures a significant competitive advantage in the process. Neat. Trump needs a deal with China to avoid a crushing defeat in the election next year. A delay to the next round of tariff hikes was announced this week as a gesture of "good will". Beijing responded by agreeing to suspend tariff actions on certain agricultural products including soybeans. Markets responded pushing the S&P index above 3000. Ten year gilt yields rallied to 1.83%. Recession fears are overblown. John Bolton has left the Trump orbit. The hawks are losing traction. Peter Navarro, the great architect of Sinophobia, may be the next to leave the camp. Trump needs a deal with China, the trade policy is no longer a vote winner as reality dawns on farmers and blue collar workers alike ... ECB Cuts Rates ... Extends Bond Buying ... In Europe, Mario Draghi announced a rate cut of 10 basis points. The deposit rate was cut by 0.1% to a level of -0.5%. The ECB will begin a €20 million per month bond buying programme in November. Draghi warned the risks to growth are tilted to the downside. The ECB cut forecasts for EU growth this year from 1.2% to 1.1%. Growth forecasts for 2020 have been reduced to 1.2% from 1.4%. It is not clear how pushing on a string in the face of adverse trade winds will help the process. Euro markets closed higher. Ten year bond rates rallied to -0.45%. Almost $17 trillion dollars of bond stock, predominantly sovereign bonds in Japan and Europe, offer negative yield. Draghi has one more meeting before stepping down as President. Christine Lagarde has promised a review of policy on QE and negative rates upon taking office. Not all are convinced about negative rate policy. Mass-selling German newspaper Das Bild on Friday accused European Central Bank President Mario Draghi of "sucking dry" the bank accounts of Germany's savers. Trump was quick to criticize the move and the lack of response from the Fed .... “European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting US exports ,” he tweeted “The Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!” "It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of ‘Boneheads.’" Boneheads at the Fed , Trump has discovered "accents" on his keyboard. In this way progress is made ... That's all for this week, have a great weekend. We will be back with more news and updates next week! John If you haven't done so already sign up or our Guild Messaging Group, It's FREE ... Only there can you get the latest on "The Economic Consequences of M Trump" - Chapter 1 Inside the Mind of the President, Episode 3 "Why Does Trump Admire Brutal Dictators" ... Out Now ... A week in Westminster ...
Proceedings in the House achieved a new low this week. Boris Johnson accused Corbyn of being a "Big Girl's Blouse" and a "Chlorinated Chicken". David Cameron was described by the Prime Minister as a "Girly Swot". The "Mogg" was reprimanded for sprawling over the front benches in a contemptuous display of arrogance and self importance. It had been a tough week for Johnson. Oscar Wilde would be lost for words. To lose one vote is unfortunate. To lose three in two days is much more than carelessness. The Prime Minister lost his majority of one, when Tory MP, Phillip Lee crossed the house to join the Lib Dems. Neutered in Parliament, the administration decided on the full chop, sacking Tory Rebels including Phillip Hammond, Ken Clarke and Nicholas Soames. The majority of one was reduced to a deficit of forty three with a careless coup. So much for love-bombing opponents. Two chancellors, the father of the house and the grandson of Churchill were thrown out of the Conservative Party. The lights are going out all over Downing Street. Johnson is achieving the chaos in government in just three weeks, to which Theresa May could only aspire in three years. If Dominic Cummings has a playbook, it must be written in strange tongue. Forced to accept the decision of parliament to postpone the Halloween exit from the EU without a deal, the master stroke was to call for an election. Boris explained ... "I don't want an election, you don't want an election, he or she doesn't want an election" "We don't want an election. you (plural) don't want an election, they don't want an election". Amo, Amas, Amat , Amamus, Amati, Amant ... Johnson declined the verb, Corbyn declined the invitation. It was an invitation to jump into an elephant trap, covered by scant coverings of brushwood and a red flag. Somewhere in the Cummings playbook, there must be an outline of which way the votes would go in a rush to to the polls. Not everyone will play with the rules. The Prime Minister has explained he would rather be dead in a ditch, rather than ask for an extension from the EU. Resignation is not ruled out in the play book, thrown in jail for failing to follow the ruling of parliament must be in appendix two. The no deal option is now written into law. Johnson has a deadline to secure a deal by the middle of October. If no deal is secured, the exit is extended to January. The election no one wants may well take place before the end of the year. Sound and fury of the hustings, a result signifying nothing may ensue, a hung parliament beckons and off we will go again as the EU looks on ... A Decade of Renewal ... The Chancellor of the Exchequer announced his spending review this week. A decade of renewal is in the offing. More money for education, the police, defence and the health service, more money for local government including almost £2 billion for social care and welfare services. An extra £14 billion is on the table as the economy slows. Cynics may suggest this looks like a pre-election giveaway. To some it looks like a preparation for social unrest. More police on the streets, more money for water cannons, more money for riot shields and batons ... Sajid Javid has confirmed the results will follow the fiscal guidelines. Borrowing never to exceed more than 2% of GDP, total borrowing to continue to fall as a percentage of GDP. It may well be a challenging arithmetic. The economy is slowing. The latest surveys on manufacturing and construction are particularly pessimistic. Business confidence is flagging, stalling commitments to investment and job creation. The latest data on borrowing confirms borrowing in the first four months of the year was up by 60% compared to prior year. Government borrowing could be over £35 billion this year. Add in the budget for decades of renewal and the 2% target will be tested. The age of austerity is over as the decade of renewal begins. Decades of debt will follow. Expect to hear more of Modern Monetary Theory as the old fiscal guidelines are hung out to dry on the Magic Money Tree. MMT rules OK ... the beauty is there aren't any. Trump's trade war hits manufacturing ... Tough week for the President. Hurricanes hit the Bahamas, and Florida. The President played golf, then spent an inordinate amount of time explaining why he had been right all along to warn of the impending storm about to hit Alabama. The week had begun with the announcement of a further round of tariffs on goods from China. Products faced with a 10% tariff were to face a further hike of 5%. The President was furious and angry about Chinese retaliation. Trump had wanted to double the tariffs. Aides and advisors advised against the move. Further damage to stock market sentiment and the economy would ensue. It is now becoming pretty clear, the economy is slowing and Trump trade policy is to blame. The President has promised to revive the fortunes of the U.S manufacturing sector, bringing jobs back to his blue collar base. Latest data suggest manufacturing output is falling for the first time in three years. Job growth slowed to 130,000 in August. The unemployment held at 3.7%. The job data may well be revised up. No time to call recession yet despite the yelps from the yield curve. To the world it is becoming clear Trump tariff policy is damaging world trade and growth. The implications are widespread, not just confined to the U.S. and China. Growth in Australia and Singapore featured this week. Growth forecasts in Singapore are written to zero as trade with mainland China slows. In Germany the manufacturing sector is damaged by the double whammy of tariffs and Brexit. For Trump, it is clear the Federal Reserve is to blame. "Where did I find this guy, Jerome?" the President asked of Jerome Powell Chairman of the Federal Reserve, "Oh well, you can't win them all" the tweet. "You can't with them all but you can always blame others" the mantra of the 45th President of the United States. That's all for this week, have a great weekend. We will be back with more news and updates next week! John If you haven't done so already sign up or our Guild Messaging Group, It's FREE ... Only there can you get the latest on "The Economic Consequences of M Trump" - Chapter 1 Inside the Mind of the President, Episode 3 out next week. Don't miss that! |
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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