 Budget Day on Monday! Whatever next. It was tough accepting the abolition of the Spring Budget. OK, the origins were based on a land tax in a predominantly agrarian society. Even so
tradition demanded a Wednesday delivery at least. It has been on a Wednesday every year since 1962. It hasn't been on a Monday since beyond the temporary introduction of income tax in 1799. Probably for good reason. Chancellor Philip Hammond was ready to deliver the budget on Wednesday 31 October. Treasury aides pointed out to him that it's actually Halloween. With an average age of 31 years, HM Treasury staff had other plans presumably. Pity really it would have made for some spectacular headlines. Now we must speculate on the "trick or treat" contents of the Red Box. The Chancellor is off to a good start with borrowing for the current year expected to be well below forecasts. In the first half of the financial year, borrowing was just £19.9 billion compared to £31 billion last year. Retail sales growth of over 5% in the period had generated VAT revenues up by 6%. Income and Capital Gains Tax revenues were up by over 7%. For the year as a whole, borrowing is expected to fall to less than £27 billion compared to £40 billion last year. Within two years it seems plausible the books could be balanced, assuming ongoing growth of around 1.5% in this year and over the next two years. Herein lies the first dilemma for the Chancellor. It is the delicate matter of Brexit. A hard or soft outcome could affect the growth and revenue figures in the year a head. According to NIESR, their soft Brexit central forecast for GDP growth is 1.9 per cent in 2019. Under a hard Brexit scenario, economic growth slows to just 0.3 per cent. The spread is equal to £10 billion in potential or lost revenues to the Exchequer. So what can we expect in the budget? Herein is the second dilemma. Hammond would love to offer a balanced budget within a two year horizon. The Prime Minister has promised some £20 billion for the NHS and an end to austerity. One Nation Tories are demanding a fix for Universal Credit of around £2 billion to £3 billion. Hints of £1.5 billion to ease high street rates and development plans in town centres have emerged over the week-end. More money for potholes in the North and for big holes in the South East is expected. Backbenchers would like to see a cap on Fixed Odds Betting Terminals at a cost to the Treasury of £0.4 billion. So how to bridge the gap? The Americans have warned this week against a tax on US tech giants. A freeze on fuel duty has already been announced. The Chancellor would be wise to cancel the corporation tax cuts from 19% to 17% saving some £5 billion. What is so special about a 19% tax rate anyway. A reversion to 20% would save some £8 billion in total. Better that, than an unwise attack on pension contributions and pensioners specifically. Growth is the solution to the Chancellor's dilemma. The Brexit impact will not be as severe in the first year as NIESR suggests. Revenues will be higher next year but spending must be increased. Austerity has run it's course. Voters in every income bracket are concerned about a break down in law and order and the availability of first line emergency care. An expansive budget could push growth to 2% in 2019 and 2020. No need to worry about Brexit as the transition process drags into the next decade ... US economy up by 3% in Q3 ... Preliminary figures suggest the US economy grew by 3.0% in the third quarter of the year, following growth of 2.9% in the second quarter. We expect growth of around 3% for the year as a whole. The White House tax cuts and spending plans are fueling growth. Consumer spending was up by 3%, spending on durable goods was up by 6%. Investment increased by over 5% in the quarter. Investment on capital goods was up by 6%. It's all good news for President Trump ... or is it? Government borrowing is taking a hit with borrowing set to hit the $ trillion dollar level in the current financial year. The trade deficit is also taking a hit. In Q3 imports of goods and services increased by almost 6%. Goods imports increased by 6.5%. Exports in comparison, were up by just 4%. There may be some element of front running ahead of tariffs in the data but strong growth in the US will result in a higher trade deficit despite the introduction of trade barriers with China and the rest of the world. So far the evidence on tariffs is mixed. Caterpillar warned the US trade war with China was driving up the costs of raw materials and overshadowing the outlook for growth in the medium term "Material costs were higher primarily due to increases in steel prices and tariffs." the claim. Ford warned of a deteriorating outlook for sales in China. BMW announced plans to take control of the Chinese joint venture and to expand production on the main land. Harley Davidson announced earlier in the year, plans to relocate some production outside of the USA. Trump's tariff plans will create problems for the US economy. The trade war with China will not provide any solutions for Uncle Sam in the short or medium term. Exports to China are founded on agriculture and raw materials. Soybeans, cotton and corn feature along with copper, coal and aluminum. Aircraft, vehicles and machinery account for 40% of exports. Relocation to China and South East Asia will figure in forward plans for manufacturers, as new alliances are formed in the largest trading block in the world. Tariffs will push them into relocation. The Largest Trading Block in the World ... Prime Minister Shinzo Abe was in China this week along with a big trade mission from Japan. From competition to co-operation the mantra, the two nations signed a broad range of agreements including a $30 billion currency swap pact. Japanese firms including Toyota are planning on a normalisation of ties with China. They seek to compete with US and European rivals as diplomatic tensions ease between the two nations. The prize for all is the unification of Korea within an economic trading block at least. This week the scariest place on earth just got a little less scary. North and South Korea removed all weapons and ammunition from the Joint Security Area. South Korean President Moon Jae-in and North Korean leader Kim Jong Un have vowed to turn the entire DMZ into a peace zone. Earlier this month the leaders agreed to begin the re connection of road and rail links promising easier passage for families, friends and tourists! Economic co-operation would accelerate growth and equalization. South Korea has a population of 51 million and a GDP per capita of $33,000 dollars. The North has a population of 26 million and a GDP per capital of just $600 dollars. A move to equalization, would ensure, the Korean peninsula would become the eighth largest economy in the world. Together, China, Japan and Korea would form an economic area larger than the USA, Canada and Mexico. Australia, New Zealand, Malaysia, Singapore and Vietnam would form part of the new South East Asian trade block. China, with growth of 6.5% this year is the second largest economy in the world. With a population of 1.4 billion, China still struggles to enter the top 50 in the world in terms of GDP per capita. The potential is huge. Leaders around the world are concerned about the vagaries of the White House administration. Policy lacks coherence. Trump's tariff tantrums are becoming irrelevant as the world makes alternative plans. The move in South East Asia is so significant. Next Russian membership of the European Union. Where then would sit Uncle Sam ... That's all for this week, have a great week-end, Don't Miss Our Monday Morning Update this week, we will expand further on market moves ... John
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 Nick Clegg will be the next head of of global affairs at Facebook. He will be moving with his wife, Miriam Gonzalez and their three children to California. Ms Gonzalez will pack in her job as a partner at the international law firm Dechert. It must have been a tough decision.
According to the Times, two years ago Sir Nick said "I'm not especially bedazzled by Facebook". "I find the messianic Californian new worldly touchy feely culture of Facebook a little grating." It is suggested Nick Clegg turned down the initial approach. It took a phone call from Sheryl Sandberg and a subsequent meeting at the home of Mark Zuckerberg to clinch the deal. Two hours in the garden with the Facebook founder must have been the turning point. Stock options and a hefty salary may have helped. The average pay of a senior FB exec last year was $25 million dollars. Sir Nick's salary has not been disclosed. He will surrender his UK £115,000 a year parachute after losing his seat in the latest election. The social media giant faces several challenges in the geo-political sphere. Interactions with sovereign government are increasing in relation to taxation, data security and political message manipulation. It's a great move to bring in a politician, a former deputy Prime Minister of the UK as head of global policy and communications. Yes and he is even quite liked in Europe! What's not to like! Borrowing falls ... A great boost for the Chancellor this week. Borrowing fell at the half year stage to £19.6 billion. This compared to £30.6 billion last year. Despite the sluggish growth in the first half of the year, revenues were boosted by higher tax receipts. Spending plans were constrained, producing a radical improvement in the underlying financial performance. For the year as a whole, borrowing could fall below £28 billion compared to almost £40 billion last year. It may even be lower if largesse is constrained in the budget statement later this month. The Prime Minister has promised an end to austerity. The Treasury is challenged to find an extra £20 billion for the NHS. Government debt is around £1.8 trillion (84% of GDP). Despite the improvement in the borrowing figures, there is little scope for a radical boost to spending plans in the absence of significant tax rises. The latest job figures confirm the economy is tracking well. Unemployment fell to 1.36 million in August. The unemployment rate held at 4%. The number of vacancies in the economy was steady at 833,000. Sector pressures were most evident in the hotel, food and beverage sectors along with retail, health and social care. It is entirely unclear how government immigration policy is set to address the fundamental structural problems in the UK jobs market. Wages are increasing. Pay levels suggest 3% growth will be the norm into the final quarter. Good news for households, as the headline rate of inflation fell to 2.4% in September. Goods inflation and service sector inflation fell back from prior months levels. Real wage growth will boost spending in the run up to Christmas. Retail sales in September were up by 3% in volume terms and almost 5% in value. The UK economy is holding up well. We expect growth of 1.5% this year. A boost to government current and capital spending would push the growth rate higher. An improvement in productivity would be the reward. And then of course, there is the rather difficult question of Brexit … Round and Round we go ... Sterling closed above the $1.30 mark this week. Strange really. Ten year US bond yields closed at 3.2%. The inflation data will make it difficult for the MPC to move rates in the short term. UK gilt yields fell to 1.5%. The Fed will push US rates higher in December and through 2019. We expect 3.5% could be the level of US base rates by the end of next year. The yield curve will push bond prices lower. 4.5% will be the next US yield target. The Transatlantic spread should be pushing the "Greenback" higher and the Pound lower. Sterling is floating on a Brexit Breeze, baffled by noises off. Positive news pushes the pound higher. Negative news places pressure on the rally. The $1.30 level holds. Barnier suggest a deal is 90% agreed. The Prime Minister has offered to stay within the Customs Union indefinitely. The transition process may be extended for a further year beyond the existing two year horizon. Unfortunately, the Prime Minister, "Primus Inter Pares", is operating "Ultra Vires" in an attempt to get an agreement with the EU. It would appear neither cabinet, nor back benchers nor the opposition party are in agreement with May's moves. "Backbenchers Tell May To Justify The 'Betrayal" the story line in the Times today. The Prime Minister will be hauled before the 1922 committee this week to explain concessions made to Brussels. Another tough week in office lies ahead. Perhaps a job as head of Global Affairs for Twitter could be the future, once the deal is done! Either that or a spot on Strictly Come Dancing. Life is just a preparation for what lies ahead ... That's all for this week, have a great week-end, Don't Miss Our Monday Morning Update this week, we will expand further on our market views ... John  The UK economy expanded at a slightly faster rate in the three months to August. Growth was 1.5%, up from 1.2% in the first quarter of the year, according to the latest ONS monthly tracker,. Construction output was flat. Manufacturing output was up by 1.3%. Service sector growth increased by a modest 1.6%. For the year as a whole, we expect the economy to expand by 1.4% or 1.5% at best in the absence of any major data reviews. This week, Jaguar Land Rover announced a two week shut down following a sales slump in the UK and overseas markets. Britain's largest carmaker will close its Solihull plant for two weeks later this month, following a near 50 percent fall in sales to China. China's automobile sales have been falling in recent months. Sales fell by 12% in September. It was the third consecutive month of falling sales. For the first time since the 1990s, the industry may experience a drop in car sales year on year. The economy is slowing. Trade frictions are making consumers cautious about spending on big ticket items In the UK, new car registrations fell by 20% in September. Diesel sales were badly hit. New regulatory requirements hit availability in the month. The impact on manufacturing in the sector and related industries may impact on third quarter growth overall. As fears over Brexit increase, manufacturers may seek to augment stock levels of raw materials and components to offset continuity of supply risks in the short term. The impact on growth is expected to be minimal in the short term. Any impact on output would be largely offset by a deterioration in the trade deficit. IMF issues world trade warning ... The IMF has cut it's growth forecast for the US next year, warning that Trump’s protectionist trade policies will harm growth domestically and around the world. In the World Economic outlook, released Monday evening, Global growth is expected to be around 3.7% for 2018/19 down from an earlier forecast of 3.9% just a few months ago. The U.S. economy is expected to grow 2.9 percent this year and 2.5 percent next year. In April, the IMF forecast the U.S. economy would grow 2.7 percent in 2019. “If you have the world’s two largest economies at odds, that’s a situation in which everyone is going to suffer,” said Maurice Obstfeld, chief economist at the IMF. The IMF also reduced its growth forecast for China next year to 6.2 percent because of the trade war. The IMF repeatedly singled out Trump’s trade actions as disruptive to global growth and prosperity, especially the imposition of tariffs on roughly half of the goods that the United States imports from China. The US trade deficit with China is increasing despite Trump's tariff war. China enjoyed a record high $34.1 billion trade surplus with the United States in September, taking the surplus for the year to date to $225.8 billion. That’s significantly higher than the $196 billion recorded between January and September last year. Trump keeps and eye on crazy Fed ... Trump has been outraged by the actions of the Federal Reserve blaming Fed Chair Jerome Powell for causing the turmoil in stock markets around the world. According to the New York Times this week ... "President Trump responded to falling stock prices on Thursday by continuing to throw rocks at the Federal Reserve. He described the Fed as “crazy,” “loco,” “going wild” and “out of control” for slowly raising interest rates against the backdrop of a booming economy." No other modern president has publicly attacked the Fed with such venom or frequency but someone has to take the blame. Trump has been riding the economy hard, bragging about job creation, tax cuts and reduced regulation, and claiming credit for the rise of the stock market. Now that the market has lost 5 percent of its value in the last week, Mr. Trump is insisting someone else is to blame. The American economy continues to grow, prompting the Fed to raise interest rates and drawing the president’s anger. The Fed’s chairman, Jerome H. Powell, has said that the economy is in a “particularly bright moment”. He sees no clouds on the horizon. Despite the criticism, Trump has said he doesn't want to fire the Fed Chair. It is not even clear if he could. Markets would react badly to any move to politicize the central bank. The Federal Reserve Act of 1913 established the Federal Reserve as the central bank of the United States to provide the nation with a safer, more flexible, and more stable monetary and financial system. "Safe in their hands" is not a mantra one would associate with Trump in control ... That's all for this week, have a great week-end, Don't Miss Our Monday Morning Update this week, we will expand further on our market views ... John Plus! Don't Miss the pro-manchester economics conference on the 18th October. I shall be anchoring the "show" and providing an update on prospects for the UK and World Economy. Book Now We have great agenda and line up of speakers on the day as we discuss the "Economics of Greater Manchester".  The Prime Minister danced onto stage at the Conservative Party Conference this week. I say dance, it was more an expression of limited movement, a bit like the approach to negotiations with the EU.
Bouyed by the success of the African tour, Theresa May appears to be angling for a spot on "Come Dancing" in a celebrity life post Number Ten. We may have to wait some time. Despite rumblings on the back benches, the Prime Minister shows little signs of quitting. "Britain's best years are still to come" assured the PM. It could have been a reference to her own career. "The end is in sight for austerity" Hurray! "We must be the party for everyone." OK. The remarks will come as a bit of a surprise to those households set to lose £200 quid a week as a result of Universal Credit roll out. The comments will also come as a bit of a surprise to the Treasury, set to find £20 billion to $30 billion quid to fund post austerity largesse. There were several major announcements, primarily the Chancellors begrudging freeze on fuel duty for the ninth year in a row; removal of the cap on how much councils can borrow against their Housing Revenue Account; and commitments on health care and cancer care specifically. Most of the conversation in conference was devoted to the difficult issue of Brexit.The highlight was of course Jeremy Hunt. He compared the EU to the Soviet Union, accusing it of becoming “a prison”, vowing to “fight” for the Brexit deal Britain wants. Excellent diplomacy, never a strong point for Foreign Secretarys of late. "Gunning for the Gulag" may become the new negotiation strap line. Well if only we knew what we want. Canada Plus or Canada Dry? The deal from that place in the Chilterns that rhymes with wreckers. "Chuck Chequers" had become such a slogan for the Brexiteers, the term "Chequers" was dropped altogether from the Prime Minister's speech. The Prime Minister will plough on with the plan despite resistance from Brussels and her own party. A beefed up agenda may yet win the day. "Chubby Chequers" would be my personal favourite with a "Twist Again" them tune to bodge the problems of the Irish border. Jean- Claude Juncker, late this week, suggested an agreement could be achieved in weeks! Donald Tusk was less optimistic, it was ever thus … House Price Steady, Car Sales Slump ... House prices were steady in September despite headline news of a fall in prices. According to the Halifax HPI, house prices were up year on year by 2.5% in the month. The average house price was £226,000 approximately. Russell Galley, Managing Director of the Halifax said "Mortgage approvals and housing completions remain broadly unchanged". A pick up in wage growth has eased issues of affordability slightly. It was a similar story at Nationwide. House prices increased by 2% in September. Prices are expected to increase by just 1% for the year as a whole according to Robert Gardner, Nationwide's Chief Economist. Pessimistic? Perhaps. In general we would expect house prices to move in line with earnings. A rise of 2% to 2.5% may be possible assuming no real setbacks for the UK economy. Setbacks for the Motor trade were evident, as new car registrations fell by 20% in September. It's the big month too! Car sales fell to 339,000 from 426,000 last year, a fall of 20.5%. Year to date sales were down by 7.5%. Diesel sales were down by 40%. The big drop was largely blamed on supply side restraints. Manufacturers are struggling with the timetable of tougher emissions targets and regulatory approvals. The situation should ease through the rest of the year. Business confidence and consumer confidence are also overhanging sales performance in the year to date figures. Sterling closed higher this week against the Euro and the Dollar. Excitement about a deal with Brussels pushed the currency higher ... if only ... Strong Jobs Growth pushes markets lower ... Strong jobs growth data in the U.S. pushed markets lower around the world. The unemployment rate fell to 3.7% as 134,000 jobs were added to the payroll. The data may have been affected by Hurricane Florence. Retail, leisure and hospitality jobs fell by almost 40,000, sectors most vulnerable to hurricane setback. In August the payroll gain was revised up. August was already reported to be strong, but now looks to have been a blockbuster month for job creation. The previously reported 201,000 jobs added has been revised up to 270,000. Despite the strong jobs creation, wages and inflation remain muted for now. Markets were spooked this week despite the goods news on NAFTA. The Amazon commitment to a $15 dollar per hour minimum wage disturbed as fears for earnings and prices escalated. Ten year bond yields moved higher to 3.2%. We expect a further rise to 3.5% in the short term. The Fed is committed to at least one additional rate rise this year, with more to follow in 2019.The yield curve is not inverting, long rates are rising, to offset the short rate move. The yield curve is returning to norm after years of life on Planet ZIRP, expect 3.5% rising to 4.5% over three years. Stocks have nothing to fear from rising yields and Fed rate action for now. The moves are a reflection of strong growth in the U.S. set to expand by over 3% this year and next. Expansion will be good for earnings and share prices for some time to come ... the downward moves have been overdone ... That's all for this week, have a great week-end, Don't Miss Our Monday Morning Update this week, we will expand further on our market views ... |
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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