"It will cost you money" says the Chancellor’s Brexit Review. Based on Treasury estimates, GDP could be 6% lower and families would be worse off by £4,300 if the UK leaves the EU, according to the Chancellor’s and Treasury review published this week.
Michael Gove suggested the Chancellor is treating UK voters like children. They must be children with a fair grasp of economics and a basic grounding in econometrics. The Treasury is using a Gravity Density Model to identify the risk to international trade of a decision to leave the EU. The results are then compiled with NIESR’s global macroeconomic model NIGEM, to produce estimates of the impact on GDP over the next fifteen years.
The report explains why the Gravity Density Model is preferred to a Computable General Equilibrium Model (CGE) or a Dynamic Stochastic General Equilibrium Model (DSGE). The Treasury report runs to over 200 pages and identifies the risk to the pocket and the threat to Pharmaceuticals, Aerospace, Motor and Financial Services specifically.
Aligning the IMF, HM Treasury and the Bank of England against Michael Gove and the “Leave” campaign group may seem like overkill. Flying in President Obama to deliver the “Remain” message may seem a little over the top. As for the 200 page Treasury Report, most will be happy to accept the summary and skip the economic theory and modelling process.
Confused by Brexit? …
The Saturday Economist on Brexit …
We have had over 3,000 hits on our Brexit presentation published on line. We analyse the issues into the Business, Economics, Political and Social arguments. Almost 100 slides with all the information needed to understand the key issues in this important vote.
Over the next few weeks we have a great series of events with debate from either side. Don’t miss the John Longworth event on the 4th May and Sir Richard Leese later in the month. Tensions will rise in the run up to the campaign. So what happened in the UK this week? …
Retail Sales …
Retail sales volumes increased by 2.7% year on year in March as sales values dipped slightly by -0.1%. Online sales increased by 9% accounting for just over 13% of all retail activity. Textiles, clothing and footwear sales fell in the month by 6% offset by a similar increase in department store activity.
In 2014, the volume of retail sales increased by 4.5%. We expect a volume increase of 4% in 2016 with a near 1.5% increase in retail sales values.
Government Borrowing …
Government Borrowing fell in March to £4.8 billion compared to £7.1 billion. For the year as a whole government borrowing was £74 billion compared to £91.7 billion prior year. In theory, the Chancellor failed to meet the OBR forecast by £1.8 billion. To be fair, Robert Chote had suggested the first estimates may be ahead of the final figure, forecast to be near £72 billion.
Is the shortfall significant? Not really. The near £20 billion reduction is a fair achievement with low nominal GDP growth, sluggish earnings and low retail sales value expansion in the year. The Chancellor seems set to achieve a further target reduction of almost £20 billion in the current financial year 2016/17. No need to panic just yet! “Brexit” could impact on government revenues by as much as £45 billion per year according to the Treasury update.
In 2015/16 total revenues increased by 3.6%. A 4.4% increase in VAT, income tax and capital gains tax assisted the process, as revenues from the asset purchase facility fell by £2 billion year on year.
Expenditure was held at prior year levels more or less. Total current expenditure was £652 billion compared to £650 billion prior year. Interest payments were £45.1 billion, down on the prior year £45.2 billion. Life on Planet ZIRP is making it easier for the Treasury to control the spend on debt interest.
The Job Figures were released this week …
The claimant count rate was unchanged at 2.1%. The overall unemployment rate held at 5.1%. The number of people unemployed held at 1.7 million in the three months to March.
The vacancies data has been subject to significant revision and appeared to fall in the three months to March to 751,000 compared to 754,000 prior month.
Average weekly earnings for employees in Great Britain increased by 1.8% including bonuses and by 2.2% excluding bonuses compared with a year earlier according to the latest ONS data. For the first three months of the year, nominal earnings increased by 2.3%. Earnings in the construction sector increased by almost 8%!
So what of rates?
The ECB held rates this month with no expansion of QE. Latest data from China suggests the threat to the world growth is dissipating. US jobs data confirms the recovery. The Fed is now more likely to continue with the rate hikes later this year. The UK will surely follow.
Ian McCafferty admitted in a speech this week, his about turn on a rate rise had been forced by the sluggish earnings growth in the UK economy. The jobs data continues to suggest an economy which is at levels above the pre recession period in 2008. Service sector inflation is 2.8%. Business and Financial earnings are increasing by 3%. Construction earnings are increasing by 8%.
We expect earnings to increase above 2.5% in the second half of the year. McCafferty has indicated the path of rates will rise, should earnings start to move as is now widely anticipated.
So what happened to Sterling?
Sterling closed up against the Dollar at $1.440 from $1.418 and up against the Euro at €1.280 from €1.254. The Euro moved down against the Dollar to 1.125 €1.143.
Oil Price Brent Crude closed up at $41.64 from $42.43 The average price in April last year was $59.52.
Markets, were mixed - The Dow closed at 10,352 from 17,924. The FTSE closed at 6,294 from 6,342.
Gilts - yields moved up. UK Ten year gilt yields closed at 1.60 from 1.43. US Treasury yields moved up to 1.88 from 1.77.
Gold closed at $1,243 ($1,226).
That's all for this week. Don't miss Our What the Papers Say, morning review! Follow @jkaonline or download The Saturday Economist App! Our review of the Brexit facts and figures out now! Download Here!
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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.