Theresa May was in Florence this week. Plastering the cracks in the city of Renaissance, that's a tough job. Johnson and Hammond were on hand to ensure the Prime Minister held the centre line. No tilt too far, to hard or soft Brexit. This was Florence and not Pisa after all. No leaning tower, just an upright delivery of the olive branch to Brussels.
The PM had one eye on Brussels and the other on Manchester. The Tory party conference looms. Difficult to plaster the cracks on the front and back benches. Brexit means Brexit, albeit now in 2021, five years after the referendum result. "The eyes of the world are upon us, at a critical time in this defining moment of a vibrant debate, as we begin a new chapter for truly global Britain". "Shared history, shared challenges, shared future". Yes waffles in the land of pizza and pasta.
"The next few years are going to be an exciting time" said the Prime Minister. Just over 5,000 words with little content, were hardly reassuring. "The UK has never totally felt at home in the European Union." You speak for yourself Theresa. We know those jingoistic crackpots in the Tory Party never were.
I just enjoyed a pleasant holiday in Sicily, resenting the fact that £106 quid was extracted from my current account in Manchester, to deliver €100 euros from an ATM in Naxos. So much for parity!
Anyway, back to Florence. Good news there will be a two year transition period once negotiations have been finalized. The U.K will stay in the single market and in the customs union. We will pay to stay. We accept, bills must be paid before talks about trade. We will guarantee the rights of EU citizens, subject to the rule of law and the European Court of Justice. "We love you" the PM said. Your status will be sorted out "quickly" as a top priority. The speech was a bit short on detail. We already know that Ireland has "unique issues" which will need to be addressed said the PM. Interesting but hardly original. I think Oliver Cromwell said it first.
Cromwell also said "Depart I say and be done with you". It sounds even better in French.
€40 billion euros is the offer. The Irish jig has just begun. Brussels will accept the opening bid, then ask for more. The Conservative Conference may not even accept the opening stance. Boris Johnson was not in Italy to endorse the Prime Minister, he was merely taking notes, witnessing the Betrayal of the Brexiteers …
So what of borrowing ...?
Good news for the Chancellor this week. Borrowing in August was just £5.7 billion, over £2 billion lower than prior year. The year to date total was £28.3 billion slightly lower than prior year. The Chancellor has some room for manoeuvre in the Autumn budget but not much.
Public sector debt (excluding public sector banks) was £1.8 trillion at the end of August, equivalent to 88.0% of GDP. This was an increase of £150.9 billion on the same period last year. Moody's, the credit agency were not impressed. The UK was downgraded to Aa2. "Leaving the European Union was creating economic uncertainty at a time when the UK's debt reduction plans were already off course". Her Majesty's Treasury was displeased. Downing Street said the EU view was outdated. A reference to the credit agency of course and not the Tory backbenches.
The Retail Sales Boom Continues ...
Retail sales in August were up by 5.6% in value terms and 2.4% in volume. Online sales increased by over 15% again. No real signs of a household income squeeze and a hit to spending. The pound in your pocket may be shrinking as inflation increases but the tills are still ringing. Base rates at 0.25% are incompatible with such strong growth in spending. Will the Bank move before the end of the year? The odds have just increased.
In the U.S. the Fed remains on track to increase rates again in December. The Federal Reserve has called time in the $4.5 trillion bond buying spree. The final tranche will be purchased this month. Janet Yellen has called an end to the QE experiment . We were never sure what it achieved anyway, apart from creating the biggest bond bubble in history, set to pop and soon.
“It’s pretty clear that QE works in terms of having the expected impact on bond-market yields, and on asset prices more generally,” former Fed Governor Jeremy Stein said . While it’s a “bit of a leap to conclude that it also stimulates” the economy". "Does The Fed Even Know If QE worked", the headline in the Wall Street Journal this week, the academic debate may run and run but we knew from the outset and said so!
That's all for this week. Have a great week-end ...
© 2017 John Ashcroft, Economics, Strategy and Social Media, experience worth sharing.
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