Pure Illusion ... Tusk Comments On Chequers Corn ...

The "Inner" Cabinet met at Chequers this week. The private dinner was organised to thrash out policy for May's imminent speech on Brexit. Corn soup was on the menu; Corn was on the agenda. The good news, no resignations resulted from the debate. The bad news, the corn soup was "vile" according to reports from Sam Coates in the Times today.

"Slide Shows, Soft Talk and "Vile" Corn Soup", the headline, everyone got on reasonably well, the sub text, nothing much decided, the interpretation. The Brexit Lexicon was extended yet again to include "Managed Divergence". Yes managed divergence, not in the Single Market but with access to the Single Market. Not in the customs union but in a customs union. No EU regulation but matched UK regulation. No transition period but a period of implementation. The "Scrabble" diplomacy continues.

"Three baskets" is the working title for the strategy on regulation. "Three basket cases" the interpretation from the EU. Under “three baskets” the UK would look at existing regulations and decide whether it wanted to keep them the same as now, whether it wanted to modify regulations to achieve the same goals, or whether it wanted to completely break with the EU in certain areas.

Yes we have the whip hand, a confident member of the Question Time audience revealed this week! Good to know. The Commission response was to explain the approach is unacceptable. "UK views on regulatory issues including the "Three Baskets" approach are not compatible with the principles of EU guidelines", the message.

Donald Tusk was more explicit. He told reporters on Friday: “I am glad the UK government seems to be moving towards a more detailed position.“However, if the media reports are correct, I am afraid the UK position today is based on pure illusion. It looks like the cake [and eat it] philosophy is still alive.

Leo Varadkar, the Irish Taoiseach, insisted that the single market was “not à la carte”. Michel Barnier, the European Commission’s chief negotiator, has repeatedly said that the UK cannot “cherry pick” which aspects of the EU it wants to retain.

No à la carte menu, no cherries for the fruit course, no cake for dessert. Just vile corn soup on the menu for the UK. One step away from Dickensian gruel, imported oatmeal boiled in water from foreign owned utility companies, the vision.

David Davies, explained Britain will not be "plunged into a Mad Max-style world borrowed from dystopian fiction". Strange the downsides Whitehall considers. Just over one year to go and we have no idea what the "acceptable ask" will be. The planned speech on Friday, is unlikely to clarify negotiations or mollify the Europhobes …

Hammond offers right perspective  ...
Good news for the Chancellor this week. Borrowing in the year to date fell by £7.2 billion to £37.7 billion. January is always a good month for tax receipts. 2018 was no exception. The deficit will fall below £40 billion in the current financial year, down from almost £46 billion last year.

The Office for Budget Responsibility forecast public sector net borrowing would be £49.9 billion during the financial year, an increase of £4.1 billion on the out turn in the financial year ending March 2017. This begs the question about the accuracy of the OBR model or of the quality of the information passed through to the OBR by Treasury.

Good news on investment. Investment in the economy grew by almost 4% last year. A surge in government investment of 9% in the final quarter assisted considerably. Overall business investment increased by just 2%, despite an increase in capital stock, housing and commercial real estate.

Productivity is improving as the labour market tightens. Unemployment increased slightly as the number of vacancies increased. Earnings are consolidating around 2.5% in the final quarter. More to come in 2018.

The second estimate of GDP was released this week. The ONS revised down growth in the final quarter slightly. For the year as a whole, 2017, growth of 1.8% was unchanged. Our expectations for growth at 1.8% in 2018 remain.

In the USA, the Fed minutes suggested the Central Bank is bullish on growth this year. Four rate increases in base rates over the next twelve months emerged as a policy option. US ten year bond yields look set to test the 3% level in March as a result.

UK yields fell slightly this week. News of slowing jobs growth and the downgrade to growth in the final quarter allayed fears of significant rate hikes in the UK this year. Yields moved down by around five basis points. The Dollar rallied against the Euro and Sterling. The Pound closed just below $1.40, closing up against the Euro.

That's all for this week, have a great week-end,

John
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