the economy - update

[Rook]

Hi all - quick update for ya

Markets pricing in a 70 per cent (ish) chance that the Bank of England cuts interest rates tomorrow by 25bps.

There is a chance of course that they hold off until August to coincide with when the bank will be producing a "full economic assessment" of the impact of the EU referendum,together with its inflation report.

For those interested, the Financial planning Committee has identified 5 key areas it is monitoring following the result of the referendum, which Ive listed below. For those that aren't interested, your mortgage might just be about to become a bit cheaper from tomorrow (or August) but any savings will take another hit.

The 5 key areas being monitored are....

Current Account:

Even though the Bank believes the economy is more resilient than during the 2008-2009 crisis, further spikes in uncertainty could deter foreign investment and exert downward pressure on GBP and as well as funding conditions for UK borrowers.

Its important to note that Britain runs a current account deficit pegged around 7 percent of GDP which is amongst highest in developed world. This certainly makes the pound vulnerable in medium term to changes in foreign capital flows needed to plug the gap.

? Commercial Real Estate (CRE):

While the slowdown in the real estate market was already apparent before the referendum, further stress may trigger disruptions and amplify the required adjustment in prices. With half the investors from overseas, this sector is also particularly exposed to country shocks as we are currently experiencing given the referendum outcome.

? Household Indebtedness:

According to the FPC, the ability of some households to service their debt would be challenged by a weaker period of employment and/or income growth. As a result, households could retreat and increase their savings ratio. Lower interest rates, if decided by the MPC, would help households maintain their spending patterns.

?Subdued Global Outlook:

According to the FPC, the likely prolonged period of uncertainty as a result of the EU referendum will adversely impact the global outlook as there is an increase in risk aversion, but with the euro area hit particularly hard.

? Fragilities in financial market functioning:

These could be tested during a period of elevated market activity and volatility. In particular, financing of banks and corporates, or disruption such as the withdrawal suspension announced last week by some open-ended commercial real estate funds, need close monitoring to avoid threat of knock on effects.

Edited 1 time(s). Last edit was july 15, 08:47am by Rook.

[TwoScoops]

Thks - agree the euro area will be hit hard. It's not a safe haven and too much political and economic uncertainty.

Expect Carney will be very dovish even if they don't cut tomorrow !

[Rook]

Hi all

No change then, but minutes from the meeting were relatively cautious compared with market expectations, focusing on rising uncertainty and a marked decline in firm and household sentiment. (Remember that its sentiment that changes behaviours, and its behaviours that change markets)

Committee members also focused on surveys not typically considered, given that only in mid-August will actual economic data reflect the post-referendum impact while it is late July for typically monitored surveys (CBI, PMI, etc.).

3 main things in the minutes to the meeting worth noting:

INVESTMENT =

On the back of the ad-hoc Institute of Directors survey, as well as the latest Deloitte CFO survey, it appeared very likely that business investment was to decline markedly. This was corroborated by approximately one third of the Bank of England Agents responding in a similar fashion, as well as by the Lloyds Business Barometer, where confidence fell to its lowest level since the Eurozone crisis. Equally, on the back of the June RICS survey, Bank staff had significantly revised down their forecast for housing investment.

CONSUMPTION=

The Committee noted that, while the special post-referendum GfK survey on consumer confidence showed a marked decline on the back of a pessimistic economic outlook, payment systems data had not shown any material decline. As such, the Committee claimed that household consumption could slow once broader economic weakness manifests itself in the labour market. The Committee did comment, however, that as a result of the June RICS survey, it had revised down the near-term outlook for house prices, which was expected to act as a gradual drag on household consumption.

LABOUR MARKET=

The latest REC Report on Jobs had indicated a marked fall in permanent staff placements in the run-up to the referendum, although Bank of England Agents had indicated that pre-referendum they planned to scale back recruitment plans anyway, which would be consistent with a general expectation that the unemployment rate will rise.

The market now definitely expecting a rate cut in August - but I personally think they will use a range a tools at their disposal. More generally I would say that using the consumer confidence surveys as a benchmark the hard data will likely be adverse, so expect more market movement over next couple of months (most likely pound another leg lower again etc)

Cheers

[malumbu]

The BBC news article in Stoke on Trent seem to have it right. Portmerion potery saying that they were expecting getting of for a reduction in 20% of sales due to economic uncertainty.

The rabid lady on interviewed on the streets was more optimistic - come back in a year and we will show you. Why she was so angry I couldn't work out seeing as she had 'won'.

[Henry_17]

Rook,

What has the capital account surplus / deficit been the past couple of years? In the discusion of risk areas you summarised did the FPC provide estimates as to what level of capital account flows they expected, or an estimate of what level would be required for a stable GBP? your view?

[Lordship 516]

Henry_17 Wrote:

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> Rook,

> What has the capital account surplus / deficit

> been the past couple of years? In the discusion of

> risk areas you summarised did the FPC provide

> estimates as to what level of capital account

> flows they expected, or an estimate of what level

> would be required for a stable GBP? your view?

"The current account deficit narrowed slightly from a record7.2% of GDP in 2015 Q4 to 6.9% in 2016 Q1 (Chart A.7), but

it remains high by historical and international standards. The widening of the deficit since 2011 has predominately been

driven by a sharp deterioration in the primary income balance, which fell from 1.0% of GDP in 2011 Q4 to -3.1% in 2016 Q1. The UK trade deficit has remained broadly stable over the same period.

The weakness in primary income, which largely consists of net investment income, has been mainly due to weaker foreign

direct investment (FDI) earnings. Since 2011, UK-residents? earnings on their outward FDI have fallen substantially, while foreigners? earnings on their inward UK FDI have been comparatively stable. While the fall in earnings on outward

FDI has been relatively broad-based across the main industrial sectors, the weakness in the mining and quarrying sector has been particularly pronounced, explaining around half of the total fall in UK earnings on outward FDI since 2011

(Chart A.8). This has coincided with lower oil and other commodity prices. The recent fall in the value of sterling should have the effect of narrowing the current account deficit. For example, it should have a positive impact on the United Kingdom?s net investment income, as receipts on foreign-currency denominated assets will be worth more."

I would expect the Current Account Deficit to come in for Quarter 2 to be in the region of 7% to 7.1% of GDP [let's see what their report on 30th Sept 2016 will produce] & from analyzing their report & other sources, applying realistic criteria/projections it appears to me that the Current Account Deficit for Quarter 3 will reach a new record at more than 7.2% of GDP, more likely to be in the region of 7.5% or ?35.5Billion.

This would trigger more negative economic sentiment and reductions in economic behaviour unless the government will produce something significant that will stimulate growth, investment, employment & incomes. The government [& the BoE] has to take the lead & not only waffle on about the great future for the UK but take pragmatic steps to lead the way forward.

The BoE is between a rock & a hard place - either stabilize inflation & risk a certain fall in growth below 0% & increased unemployment or accept a period of heightened inflation in the interests of going for growth & maintaining employment. There is only one locomotive to achieve this & that is government investment. The Brexiteers wanted control - now they have it they need to be bold & decisive & make that decision - sooner rather than later.

A 10-year national program of self financing investment in the order of ?20/?30billion per year would put the UK on the highway to long term growth & stability if it is targeted towards improving the essential elements of the economy. Borrowing that generates growth can reduce the debt-to-GDP ratio. Projects such as massive housing development for rental to all sectors would be self liquidating & could be achieved off balance sheet through issuance of bonds or other instruments to/by not for profit SPVs [please God not Housing Associations !]. Projects such as building/improving essential infrastructure that would also be self liquidating would also fit the bill. HS2 nor HS3 do not fit this criteria as the payback is uncertain in both time & yield and in these austere times ought to be put to one side in favour of improving existing networks where the benefits are measurable & can be implemented in the relative short term. Improvements in education provision are also needed as would vocational training to beef up the skills necessary to provide the indigenous workers for such a massive investment program. Direct investment in government facilities such as prisons, hospitals etc., instead of PPP projects, would also return dividends to the public purse instead of generating profits for private interests & increased burdens on the exchequer for generations to come.

Strong planning provisions would have to be put in place such as use-it-or-lose-it/compulsory purchase for land holdings coupled with fast track permissions, as would robust criteria to control construction prices [such as bench-marking prices of materials & unit rates] to prevent excessive profit taking. We have a period of national crisis and such measure would be justified in the circumstances so we can rebuild/restructure the whole fabric of the country. Any supplier who doesn?t like it need not participate.

[Rook]

Hi Henry

The UK has been running a large current account deficit since the mid 80s, and I see you got some recent stats above

Worth mentioning that there are various components to the deficit, but in a nutshell- the UK imports more than it exports, and pays more abroad in terms of coupons, dividends and wages than it receives. As Mark Carney himself put it, we have to rely on ?the kindness of strangers? to help plug this gap via foreign investment flows into the UK.

Perversely, I would expect the deficit to actually narrow in a lower growth environment, as by virtue of this the UK will be simply paying less overseas, and the widely expected reduction in consumer spending should add to this. On the other side of the coin, given the referendum outcome, the real concern at the moment is that the crucial foreign investment into the UK will fall away with the uncertainty pre Brexit negotiation.

Where currency fits in is that it acts almost like a pressure value in the face of this uncertainty as it gets driven lower.If the current account gets too large, there should be a depreciation in the exchange rate to restore the balance.

I share the argument that a current account deficit is a bigger concern in a fixed exchange rate (like Euro) because there is no option of depreciation

If capital / financial flows dry up, it could of course lead to further depreciation in the exchange rate with the key risk being a fall in living standards pushing up inflation and pass through costs to UK households

Some also argue that a large deficit is also a sign of an "unbalanced economy". Osborne tried to mitigate this with his ?march of the makers? rallying cry in which he promised to increase UK exports, but alas exports from the UK actually dropped.

realistically though, in era of globalisation, financial flows are easier to attract and therefore as the UK is no manufacturing powerhouse, it makes sense that that the deficit is financed as much as possible by these capital inflows.

Also, for balance, countries with large current account surplus have not necessarily done better, e.g. Japan had a long period of stagnation, and the US is in a good place

More generally, Id say that any large scale investment in the UK is really good news as it suggests British assets (and therefore investment into the UK) is still seen as a good bet.

Good news here i see today is that Softbank has bid 24.3bn for ARM Holdings (which is 3 months of the UKs current account deficit in one swoop).

[????]

There's some reasonably good news and things have held up better so far (by far) than many predicted - the normal suspects continue to paint the bleak picture; Guardian and BBC reporting Old Mutual Fund manager assessment on the situation as "Horrible for UK" in their headlines, which is out of context - almost theatre review selective commentating - when his actual words were far more nuanced:

"I think the economy is going to judder to a halt [or] have a mild recession, but I don't think it is going to be as severe as some of these shares are pricing in... The real economy is only going to gradually emerge over the next three to six months," Mr Buxton said.

Could have done without this (Brexit) don't like the uncertainty but fook me people are really talking the UK down (and, it's the predictable sources Plus some on here, naturally :) )

[rendelharris]

As you object so much to selective quotation I'm sure you wouldn't do it yourself, so you must have overlooked this bit where the same man said:

?I don?t think there was doom-mongering, because it is absolutely going to be horrible,? he said. ?Mark Carney?s speech [in which he warned of dangers of Brexit] was absolutely spot on. This is just really bad news.

?You can criticise the Brexit team for a) an utterly mendacious campaign and b) not expecting that they would really win, so never having a plan. I mean the whole thing is literally unbelievable. It is extraordinary how we have ended up where we are.?

[Rook]

Agreed ???

Interestingly GBP got a jolt higher today as MPC member Weale has just made some pretty positive comments about future policy (or should I say far less negative). This is in direct contradiction to comments by MPC member Andy Haldane late last week which pushed GBP lower and got very widely reported on / jumped on

I noticed that not one media outlet explained that Haldane is a known "dove" / negative on economy and has been callign for a cut for 2 years. All views welcome but balance is very important - otherwise the knock on effect is that you the start to see and hear lots of views cultivated purely on the back on only negativity which I do think affects sentiment. I almost think the Guardian in particular is purposely misleading and guilty of this. I cant look at it. Maybe it sells more papers or gets more click throughs.

If it helps, I do believe that we will see a shallow recession in the UK to reflect the adjustment period/pullback but the fact is that markets are nowhere near armageddon.

[????]

Selective quotation isn't the issue it's the headline...

I don't disagree with any of that - but we are where we are so continual doom-mongering achieves nothing and makes thing worse - the headline selection is for me interesting and the relevant point.

Anyway, you got any ideas or are you caught up in the whole Corbynista against everything but no solutions zeitgeist?

[rendelharris]

???? Wrote:

-------------------------------------------------------

> Selective quotation isn't the issue it's the

> headline...

>

> I don't disagree with any of that - but we are

> where we are so continual doom-mongering achieves

> nothing and makes thing worse - the headline

> selection is for me interesting and the relevant

> point.

>

> Anyway, you got any ideas or are you caught up in

> the whole Corbynista against everything but no

> solutions zeitgeist?

The man said "it is absolutely going to be horrible [referring to Brexit]" and the Guardian headline read "Brexit impact is going to be horrible, says leading City fund manager." In what way is that "out of context" as you complained?

My ideas, for what they're worth, very much chime with what the same man said later in the same piece:

?The bigger question is: are they bolder? Do they go ?right, well we are in a different world; if we can borrow at a ludicrously low rates through extensive debt issuance, then let?s do so, specifically to invest either directly or alongside private investors in infrastructure projects?.

?We could resurface [the] M1 [motorway], we have a clear need for more gas-fired electricity generational plants. The private sector is not stepping up and doing any of this, unsurprisingly, so lets do some funding, some guarantees, make things attractive."

[????]

I don't disagree - I'd add fibre optic broadband (or whatever the next generation is called ) to that list. I do think the Tories are going to do some Keynesian stuff for sure now - Ed Milliband must be shaking his head in disbelief.

[rendelharris]

???? Wrote:

-------------------------------------------------------

> I don't disagree - I'd add fibre optic broadband

> (or whatever the next generation is called ) to

> that list. I do think the Tories are going to do

> some Keynesian stuff for sure now - Ed Milliband

> must be shaking his head in disbelief.

We agree on something, knew we would eventually! Definite yes on fibreoptic combined with a government initiative to encourage videoconferencing for business using the upgraded infrastructure instead of spending unproductive hours travelling to meetings, thereby cutting carbon footprints and doing away with the need for HS2 & 3 etc.

[Lordship 516]

???? Wrote:

-------------------------------------------------------

> I don't disagree - I'd add fibre optic broadband

> (or whatever the next generation is called ) to

> that list. I do think the Tories are going to do

> some Keynesian stuff for sure now - Ed Milliband

> must be shaking his head in disbelief.

Keynes was a capitalist & criticized unproductive government spending. Digging holes & filling them in again was an English solution during the Poor Law period & it produced no advantage other than abject poverty & broken spirit. Keynes did make a reference to this but also said it would be more sensible to build houses and the like. Just because Milliband, Corbyn etc. espouse an idea doesn't make it a bad idea nor does it make it 'keynesian' in the pejorative sense. Keynes was in favor of budget deficits during the contraction phases such as we are now in.

The criteria for infrastructure & other investment spending must be that it is productive & self financing/liquidating; it must be regarded as a desirable asset for its payback period and a significant advantage for the future generations that will continue to pay for it. Replacing inefficient infrastructure would make the economy more efficient but only if the ROI justifies the investment - notional projects must pass a rigorous test on payback in financial & social terms. The focus must be on productivity growth & avoiding crowding out the private sector.

Regardless of Keynes, Piketty, Stiglitz et al or Hammond, McDonnell or whoever, it is essential to increase aggregate demand & the only way to do this in the current circumstances is by government injection by way of funding, guarantees etc. Private housebuilders have failed to solve the normal housing shortfall not through any fault of their own [apart from bidding up the price of land bysome] but due to shortages of land available for building & shortage of buyers due to asset inflation stoked by QE. To buy the average London house [?600,625] with a 15% deposit would require an aggregate salary of ?113,450 and as we can see from recent reports the average salary for 35 year olds in London runs at ?35,000 which would at best give a combined salary of ?70,000 making it impossible for them to buy in current circumstances.

Funding was taken away from councils & housing associations were tasked with providing social housing but they are staffed with the same old staff that were running the council housing departments & are largely inefficient organizations with poor financial & estate management. They have a huge capacity within their balance sheets to borrow at preferential rates but have failed to do so. Many are sitting on assets of three to 5 times their liabilities when in a normal property company it would be geared the other way. They are sitting too comfortable and getting government guarantees for 60% to 80% of their rent from Housing Benefit & other subsidies. A few are stepping outside their original role & renting in the private rental market but the volume is low. The government ought to allow private companies to carry out the same role [within safeguards] and then some progress could be made. Financing could be made available via government guarantees through the Homes and Communities Agency [with an expanded brief] & also from insurance companies who would relish the government guarantees & subsidized rents. Management of the assets could be undertaken by specialist ALMOs.

The Germans & others have done this successfully for generations so why can we not do it also & better ?

[Rook]

Also great news on BBC site who report that Wells Fargo (one of biggest banks in US) have just purchased a large office block in the City. Looks like they believe in future of London as remaining key to financial services across Europe

Great to see some real events coming through with M&A and investment into UK to counter some of the overwhelmingly negative rhetoric/headlines weve seen recently

[Lordship 516]

Rook Wrote:

-------------------------------------------------------

> Also great news on BBC site who report that Wells

> Fargo (one of biggest banks in US) have just

> purchased a large office block in the City. Looks

> like they believe in future of London as remaining

> key to financial services across Europe

>

> Great to see some real events coming through with

> M&A and investment into UK to counter some of the

> overwhelmingly negative rhetoric/headlines weve

> seen recently

These are two good deals for the UK but it is also necessary to look at both in their own contexts.

The Wells Fargo deal was done in early March & the bank just got a 7% cut in the price. Wells Fargo is a huge bank & if they had to leave anytime & take a loss they wouldn't even notice it in their P&L or Balance sheet.

The Arm deal has obviously been in the pipeline for quite some time being offered to Softbank by the same guy that sold Pilkingtons to the Japanese in 2006. Again the buyer just got a 7% discount on the deal & the Softbank deal is offering to double UK jobs which is an added bonus. I'm sure both buyers will time their closing payments to take any advantage of further devaluations of the ? to get further discounts, so good deals all round.

Both are inward investment deals so there is only another ?10 billion or so to go for CRE inward investment for the next quarter but the Arm deal is significant & will add substantially to the Current Account & employment.

[rendelharris]

Why is the sale of one of our few outstanding success stories, in fact our only remaining one, in the technology field, ARM, to a Japanese multinational, seen as a cause for celebration? Part of the new PM's pitch for leadership was that she would intervene to try to prevent foreign companies stripmining our profitable industries, today she proudly announced she had called the president of SoftBank to congratulate him on his purchase. Last year ARM made ?414.8M pre-tax profits...next year those profits will be pouring into Japanese banks. Can someone explain why this is desirable please?

[Lordship 516]

rendelharris Wrote:

-------------------------------------------------------

> Why is the sale of one of our few outstanding

> success stories, in fact our only remaining one,

> in the technology field, ARM, to a Japanese

> multinational, seen as a cause for celebration?

> Part of the new PM's pitch for leadership was that

> she would intervene to try to prevent foreign

> companies stripmining our profitable industries,

> today she proudly announced she had called the

> president of SoftBank to congratulate him on his

> purchase. Last year ARM made ?414.8M pre-tax

> profits...next year those profits will be pouring

> into Japanese banks. Can someone explain why this

> is desirable please?

Hi Rendel,

I'm afraid I have to agree with you - not so desirable from the UK perspective but it now a reality &a short term gain. Ex-President Nikesh Arora [ex Google] who was in charge of foreign investment recently left the company due to strategic differences with the CEO/Founder Son & some major shareholders. They had been divesting to reduce debt & a share buy back; it appears there was a fundamental disagreement on strategy which caused Arora to leave, albeit on friendly terms - he is to stay on as a consultant. Mr. Arora?s departure came after he faced a barrage of criticism from investors over lackluster investments, with some shareholders having mounted a campaign to oust him.

SoftBank is struggling with slowing profit growth and $80 billion in debt that the company is saddled with following the 2013 acquisition of unprofitable U.S. wireless carrier Sprint Corp. It recently had a round of divestment supposedly preparing for this deal which will improve its cashflow & profits and hopefully their share price also. Interesting times ahead for Arm.

[rendelharris]

Thanks for that explanation. Interesting. I have the innocent/ignorant man's view of these things in general, which is that if there's a reason foreign investors want it, that's the same reason we should keep it! Allowing ARM abroad now seems shortsighted to say the least - it's not as if the world's going to be needing fewer microchips in future, is it?

[Lordship 516]

rendelharris Wrote:

-------------------------------------------------------

> Thanks for that explanation. Interesting. I have

> the innocent/ignorant man's view of these things

> in general, which is that if there's a reason

> foreign investors want it, that's the same reason

> we should keep it! Allowing ARM abroad now seems

> shortsighted to say the least - it's not as if the

> world's going to be needing fewer microchips in

> future, is it?

Sure, there is an attitude that says this - "If it's worth that to you then surely it must be worth that to me so I won't sell because its still profitable with lots of upside"

The CEO of Softbank is known for making risky investments but has recently come under pressure to engage in better financial management. Recently Softbank reduced its ratio of net debt to earnings before interest, taxes, depreciation and amortization to 3.3 times, from 3.8 at the end of March. It will be interesting to see what the effect of the Arm purchase will do to its debt ratio & earnings.Today's statement had little effect on its share price - let's see how tomorrow's performance will go in Tokyo.

[malumbu]

If I remember correctly there are people in the financial markets who make dosh out of good and bad things.

Someone I know, not exactly a mate, made great fortune out of the recession, something to do with reinsurance.

I should have course put my life savings into Euros a few weeks ago.

[Rook]

The Softbank deal is good news if you are worried that due to Brexit the UK will no longer be a good place to invest in or do business / would lose its standing for trade, commerce and or financial services. Maybe the title of the thread should be "the economy-post referendum"

Its a different argument entirely if you look at it from the viewpoint that the UK is selling itself off to foreign ownership. Well, the truth is thats been happening for many years - property and industry

[healey]

Lordship 516:

"HS2 nor HS3 do not fit this criteria as the payback is uncertain in both time & yield and in these austere times ought to be put to one side in favour of improving existing networks where the benefits are measurable & can be implemented in the relative short term."

Good points but don't agree with this bit - upgrading existing networks isn't much less expensive in the long term and adds limited capacity (often reducing it over the time period of the works). We can't rely on Victorian infrastructure forever, so let's get HS2/3 built.

[Lordship 516]

healey Wrote:

-------------------------------------------------------

> Lordship 516:

>

> "HS2 nor HS3 do not fit this criteria as the

> payback is uncertain in both time & yield and in

> these austere times ought to be put to one side in

> favour of improving existing networks where the

> benefits are measurable & can be implemented in

> the relative short term."

>

> Good points but don't agree with this bit -

> upgrading existing networks isn't much less

> expensive in the long term and adds limited

> capacity (often reducing it over the time period

> of the works). We can't rely on Victorian

> infrastructure forever, so let's get HS2/3 built.

Although the project has failed a recent Department for Transport review, on the issues of both costs and the scheduling of work, it appears that the Transport Secretary is minded to proceed with the project. The project started of with a cost of ?17billion in 2009, rising [as it does] to ?30billion & is now projected to cost ?55billion. As we are all to familiar with these projections, by the time contractors are finished with finessing their profits, these costs will undoubtedly rise with the attendant plausible reasons over the course of the project which won't see a single passenger until 2026 [or so]. However, by that time today's decision makers will be long retired on healthy pensions paid for by ever suffering taxpayers.

The question is always going to be - What better could we get for ?55billion plus ?120billion in interest over 75 years where 80% of the benefits will accrue to the West Midlands & West London but the whole country will have to pay for it ?

Just for starters, would you prefer 150,000 self funding houses that could be widely built where there is current need with no interest burden on taxpayers ?