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.