So what's the problem ...
The US economy grew by 3.2% in the first quarter of 2019. It was the strongest rate of first quarter growth in four years. The US economy has started the year with a "pop" making nonsense of the negative sentiment surrounding forecasts for the year.
We expect the US economy to grow by 2.8% this year compared to 2.9% in 2019. China reported growth of 6.4% in the first quarter earlier this month. We expect UK growth to be around 1.9% in Q1 as we explained last week. It is difficult to understand the pervading gloom surrounding central bankers.
The Bank of Canada, joined the mood swing, downgrading Canadian growth forecasts for the year to 1.7% softening rates in the process. In the US ten year bond yields slipped to 2.5% despite the strong GDP numbers. The Fed is unlikely to move on rates this year, unless we see a significant rise in underlying inflation. We attach little or no probability to a rate cut.
US growth was supported by a 2.7% rise in consumer spending across goods and services. Private investment increased by over 6% with a strong performance in buildings, equipment and IP. Defense spending increased by over 5% offsetting cuts in other state expenditure.
There were some strange twists to trade. Exports increased by 2.3%, imports increased by 1.6%. We still expect the current account deficit to exceed $600 billion dollars this year. The prospects for the internal deficit are far worse. The Fed budget balance is set to hit $1 trillion in the current fiscal year and will average over $1.2 trillion over the next five years according to the Congressional Budget Office. Debt could double to over $40 trillion dollars by the end of the decade.
There is little or no appetite to deal with the deficit among Republicans and Democrats alike. The President has made it clear the real problem will emerge, long after he has left the White House. If the Democrats have there way it could be as early as next year ... Wake Up Sleepy Joe ...
UK Borrowing Falls ...
In the UK, government borrowing fell to £24.7 billion in the financial year to March 2019. It was the lowest level of borrowing for 17 years. Borrowing was down by over £17 billion compared to prior year.
The out turn was slightly ahead of OBR forecasts in March. Chote and Chums had expected borrowing in the year to be just £22.8 billion. The March figures came in at £1.7 billion, up by £1 billion on prior year.
Total debt was £1.8 trillion, a modest 83% of GDP. Revenues in the year were up by 5%. Spending increased by just 2%. Who said debt reduction was difficult? VAT revenues increased by almost 6%. Income tax and Capital Gains Tax receipts were up by 7%. The UK economy grew by just 1.4% in the calendar year for 2018. A remarkable contribution to state coffers suggest growth may have been higher and almost certainly continued into the first quarter of the year.
Interest payments fell to £48 billion from £55 billion prior year. The coupon rate fell to 2.7% from 3.0%. The Bank of England givebacks fell to £8 billion from £9.3 billion prior year. The "money for nothing, gilts for free" policy, known as the Asset Purchase Facility, continues to yield great gains to Treasury.
Things may become a little more difficult for the Chancellor in the current year. Other spending increased by 3.4%. Public sector pay is on the rise. The pressure to boost spending on front line services are increasing. We expect growth to continue to boost tax revenues. Even so, the deficit is expected to rise to over £30 billion in the current financial year ...
Looking for a hero ...
Looking for a hero, the story in the FT today.
Headhunters have been appointed to recruit the next Governor of the Bank of England. Mark Carney is set to leave office at the end of January next year. If the bookies are to be believed, they won't have to look too far.
Andrew Bailey is the front runner. Odds of 2/1 confirm the current CEO of the Financial Conduct Authority is favourite to succeed. A safe pair of hands, with a global reputation in banking supervision and financial stability, he has served as Deputy Governor and Chief Cashier having joined the Bank in 1985.
Other insiders featured are Jon Cunliffe, Deputy Governor for Financial Stability and Ben Broadbent, Deputy Governor Monetary Policy. Odds of 6/1 are offered. The outside insider is Andy Haldane Chief Economist at the Bank. The Chief Economist is considered to be "too thoughtful and too academic" to be the institution's leader. Recent speeches on "Artificial Intelligence" and the "Future of Work" are inspirational. "The Dog and the Frisbee" a step by step guide to how a dog catches a flying object, less so.
Fancy a foreigner? Raghuram Rajan Odds 5/1 is currently a Professor at the University of Chicago Booth School of Business. As a former chief economist at the IMF and former governor of the Reserve Bank of India, Raghuram Rajan is considered to be well qualified for the role of governor, should he wish to take on the challenge.
Haruhiko Kuroda (黒田 東彦 Kuroda Haruhiko, is the current Governor of the Bank of Japan. He was formerly the President of the Asian Development Bank. He is considered to be particularly well qualified having little or no great experience of increasing interest rates.
Looking for gender balance, (chosen on merit of course) Minouche Shafik now at the LSE, Shriti Vadera Chair of Santander and Sharon White CEO of Ofcom, feature. Rank outsider, you can get 50/1 on George Osborne if you fancy a flutter.
For the moment, the bookies have stopped taking bets on Bailey, he may well have peaked too soon ...
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.