Category Archives: Economy

Economic Update April 2015

The three major themes of Oil, the Euro and Conflict continue to dominate the outlook for the world’s economy.

The oil price seems to be stabilising, subject to occasional shocks that result in blips. I suspect it has a little further to fall from current levels of $60-$50.

The Euro disturbances – especially in Greece – continue to bubble away.

Continued conflict in the Middle East is probably providing some level of support for the oil price at its current levels and in the unlikely event of peace breaking out I would expect oil prices to fall again. A more fundamental impact on several major economies is Russian efforts to destabilise Eastern Europe and the Baltic states.

In Britain, there’s considerable nervousness at the possibility of a Labour led government especially if (as seems likely) it is dragged further to the left by the need for support from the Scottish nationalists. The alternative of a Conservative led government generates concern over the promised EU referendum, but that is concern on a smaller scale.

In economic terms, if a Conservative government is returned, expect growth in the 2.8 to 3% range, possibly with a slowdown in the run up to the referendum. I’d also expect a second Scottish referendum and a very likely break-up of the UK. In economic terms that is most likely to be good for the “rump” of the UK, very bad for Scotland but might well be 7-8 years away.  I’m expecting enough concessions from the EU that Cameron can campaign for a vote to stay in, which he will win, so that the disruption of an exit is avoided.

If we have an alternative election result at best that will create an unstable government and at worst a heavily socialist regime. That will be bad of business and the economy, although the effects will take time to show. Growth rates falling back to 1.5 – 1.8%

Europe is not at all homogenous. France is still in trouble (zero growth) and I see few signs to give me hope for recovery, Germany continues to outperform (2-3%) although Putin’s antics to the east give some cause for concern. Italy seems to be on a slow road to recovery (1.5 – 2%) although the pace of reform is glacial. Spain is making good progress (2%), Ireland is well ahead (2.5%)

The US, despite the recent jobs report, has few barriers to sustained & continued growth and should see rates around the 3% mark.

China continues to be a powerhouse despite the consolidation of power and the anti-corruption drive, both of which are slowing the breakneck pace of the last few years. Growth rates of 7% or so.

Russia is in recession and likely to remain so. Removal or weakening of the sanctions imposed by the EU will help, but the oil price scenario is not helpful and neither are Putin’s political tactics with the former soviet states.

In India there are some grounds for optimism. The (relatively) new government is making some structural reforms and investment in much needed infrastructure, but it is a long slow road. Recent adjustments to the reported statistics have just muddied the waters but growth rates similar to China’s seem likely.

Latin America: the shining bright spot in the region is Mexico with growth rates of 2.5% climbing to 4-5% over a 2-3 year period. Elsewhere in the region, Oil dependent economies and political instability combined with anti-business rhetoric and legislation suggest zero to weak growth.

Economic Update January 2015

There are an awful lot of moving parts influencing the world’s major economies at the moment.

Major disruptive influences are the recent sharp decline in oil prices, driven partly by the collapse of a speculative “bubble” but more fundamentally by the increase in production (the US is now a larger producer than Saudi by some measures.)

The second influence is the Euro instability – again – which has been a recurring theme for the last few years. The two shocks that are approaching are the introduction of quantitative easing by the European Central Bank and the likely election of the anti-austerity party, Syriza, in Greece. The fear is that such a result will lead to Grexit – or Greece leaving the Euro. If that were to happen, speculators would return to attacking the other peripheral economies with a view to profiting from their exit.

Adding to pressure on the Euro is the decision of the Swiss National Bank to remove its ill-advised support for the Euro last week, leading to one of the biggest swings in currency trading in the last few years. The SNB is now left nursing large losses on all the Euros it purchased since 2007, and may well need bailing out by the Swiss government.

The third level of pressure on the Euro comes from the speculation of a possible Brexit – Britain leaving the European Union – arising from the popularity of UKIP and the conservative decision to hold a referendum.

The fall in oil prices is good news for most economies, but bad news for those economies which are reliant upon oil (and gas) exports, such as Russia, Venezuela, Nigeria and many of the Middle Eastern countries. With the exception of Saudi Arabia and Norway, these economies do not have significant cash reserves to buffer them against the decline in exports. For Russia, the decline in the value of the Rouble has a minor counterbalancing effect as oil exports are priced in USD.

UK prospects are positive, with lower oil prices driving down inflation and reasonable growth in 2015/6. The potential negatives on the horizon are political – the failure of any party to gain a majority in the upcoming election, and the possibility of a further election in 2015 if a stable coalition cannot be created. It looks as though interest rates will remain at the current level throughout 2015 with a first increase in the second quarter of 2016. The big drag on the economy will be the failure of Europe to show any real growth, but any EU exit will be long drawn out. Growth rates of 3 to 3.5%.

European prospects are poor.  The only economy showing any signs of improvement is Germany, but the markets to the west are feeble and those to the east are in varying states of turmoil.

The Russian economy is a danger zone. Low value to the Rouble, declining oil earnings and sanctions suggest that the prices of food and necessities will continue to increase. Domestic unrest is possible, but unlikely to be effective given the authoritarian nature of the regime. Recession looks set to continue for the next 18-24 months.

China continues to grow, with some signs of consolidation slowing from the previous break-neck pace. Reform of the financial system and some reduction in the level of corruption suggest a very positive outcome over the next 3-5 years and growth rates of 5-7%.

The US looks to continue an a mini-boom as the full benefits of shale oil and gas feed through, but the pace of growth is likely to slow from the 5% recently recorded to around 4% in 2015.

Asia seems set for reasonable growth, supplying China with no major shocks foreseen. Different countries will move at different speeds, but Singapore, Vietnam, Malaysia and Indonesia all seem well set for growth in line with that in China. Thailand is at risk from the health of the elderly monarch and a succession – but if that transition is smooth or does not happen expect similar growth.

 

 

 

 

 

 

 

Quarterly Economic Update – Q4 2014

This commentary seeks to provide guidance over a 3 -5 year timescale.

Europe

Overall, Europe is in poor economic health. The European central bank is now providing QE and still lower interest rates in an effort to stave off deflation. The chances are slim….it seems very likely that growth in Europe will be very limited over this period.

Pressures are both internal with the Latin economies yet to resolve their recessionary problems and external, with the southern economies hampered by events in North Africa whist to the East the Ukrainian crisis and Russian ambitions are a real cause for concern.

The bright spots are Scandinavia and Germany, but even in these economies there are significant headwinds. Their main markets (the rest of Europe) are showing no signs of growth and may still be in recession.

UK

The recovery seems to be well established across many fronts and the outlook is very positive. House prices, which were such a concern for some commentators earlier in the year, seemed to be cooling off or stabilising a little, and the Scottish referendum has removed a vast set of uncertainties.

There are still some puzzles in the statistics, most notably over productivity and output levels.

Public expenditure is still on a downward path and is likely to remain so – whichever flavour of government we have from 2015.

Inflation is at a low point, so there is little pressure on interest rates to rise. I expect to see the first moves to increase interest rates in the summer of 2015, although the Bank of England could choose to move rates up as early at Q1 2015.

The weak economies of Europe on our doorstep and our relatively poor performance as an exporter remain as constraints on growth so a rate of 3 to 3.5% will be an exceptionally good performance.

USA

Once again, the US Republican party seems to be swinging to the right, with news that Ted Cruz is a favoured candidate. It seems unlikely that the republicans will mount a sensible challenge to Hillary Clinton at the next election in 2016. In the business world, the lack of political meddling is good news. The shale gas story continues to drive the US economy, with business “re-shoring” manufacturing on the back of cheaper energy. Unlike Europe, the US demographic profile is favourable with a younger, educated, upwardly mobile population, many of whom are of Latino origin. Growth rates of 3% in 2014 and possibly 3.5% from 2015-2016.

Brazil

The Wold Cup and the Olympics may give a temporary boost to the economy, but it will be minor.

This is very much a story of unfulfilled potential, but until the infrastructure is in place and the social divides are narrowed it seems very likely to remain unfulfilled. Growth rates seem likely to be in the 2-3% range.

Russia

Putin’s antics in the Ukraine have resulted in economic sanctions and made a recession in 2014 almost certain.  The heavy reliance upon selling oil and gas to the west is hampered both by the political upheaval and the transformation of the US from a net consumer to a net exporter. Russia is seeking to replace the western oil markets by looking south and east to China. It is difficult to see much growth in Russia in the next few years.

India

Narendra Modi of the BJP party has been elected on a platform of economic reform, and has approved a numbers of defence related infrastructure projects. That’s a decent start but many problems remain in the civilian world.

Growth rates of 4-6% in the forecast period.

China

The disturbances in Hong Kong aside, the big question over China remains the size of the shadow banking sector. Unregulated or lightly regulated lending has the potential to create instability in the mainstream financial services sector, with consequences that we in the western economies know only too well.

It’s my view that the Chinese authorities will manage the reduction in the shadow sector, and although there will be some casualties they will be relatively minor.

Hong Kong’s political disturbances are likely to come to a pragmatic soloution.

Overall, very positive with growth in the 7-9% ranges.

 “Greater China”

I’m loosely defining this area as the countries surrounding China & supplying Chinese demand, from Vietnam and Thailand /Malaysia /Singapore right though to South Korea. These countries have generally good prospects, decent infrastructure and well educated populations. They cannot but benefit from rising demand in China and most have the political stability to take advantage of it.

The big risk country is Thailand, following the army coup, but there is a history of the army taking power for a few years and then reverting to democracy. In the past, the king has proven to be a stabilising influence but on this occasion he has been very quiet – perhaps through old age and / or ill health.

Myanmar, the former Burma seems more stable in this quarter than last, but it remains only a few months ago that it was a state ruled by the army.

Growth rates could be exceptional at 7 – 10%

Japan

Some territorial disputes in the South China Sea have raised their heads again. China, Japan and Vietnam all lay claim to some islands, but of course it is the natural resources surrounding ( and beneath) the islands that is of interest. That’s most likely just a side show.

Sclerotic corporate structures continue to inhibit growth.  The worlds’ 3rd largest economy will continue to grow slowly.

MENA

The main stories in this region remain political turmoil and civil insurrection in Syria, Iraq and Egypt.

The Gulf States have significant natural resources, but Middle East oil & gas is becoming less important to the world economy as Shale Gas, improved efficiency and new discoveries reduce the world’s reliance on the region.

It is difficult to be optimistic for prospects in this region.

Australasia

The Aussies had a good run up until the end of 2012, but I think they have more reasons to be optimistic about the cricket than about their economy for the next few years.

© Tim Luscombe Oct 2014

Newsnight & the Flowers interview – where were the regulators?

Watching Paul Flowers, the ex-chairman of the Co-Op bank, being grilled by Paxman on Newsnight last night, I wondered again how on earth he was ever approved to chair a bank.

 

It is bad enough that the co-op groups internal appointment process unanimously selected Mr Flowers (just how unqualified were the other candidates?) but then he was interviewed by the regulators and approved by them as well.

I’m reminded that amongst all the fury at the banking industry and the vilification of anyone even remotely connected to the banks, the regulators seem to have escaped all consequences and most of the blame. How is this possible?

Where were the regulators?

Perhaps this is unconnected, but I noted that the past chairman of the FSA, Hector Sants, took up a post in Jan 2013 with Barclays as Head of Compliance and Government and Regulatory Relations. By October 2013 he was suffering from “exhaustion and stress” and in November 2103 he resigned.

Do you have any faith in the regulators ability to prevent future crises?

 

 

 

Dictators & one party states have their benefits

Today’s news includes a note about Cameron’s visit to China and the possibility that China might contribute to HS2. They’ve built rather a lot of high speed rail links over the last few years.

Good infrastructure is one of the key requirements to attract investment and build an economy.

I remember watching the building of the convention centre in Hong Kong on land reclaimed from the harbour. From my office you could see the chain of barges coming in from the New Territories, unloading & returning for more. That and the building of the new airport (they demolished a mountain for that) were completed at an amazing pace.

At the same time, I was travelling at least twice a month to Sydney, where a new road seemed to take forever.

India, the world’s largest democracy, has made far less progress with infrastructure projects than China, who have a one party state.

Russian railways were built by the Tsars and the communists.

Mussolini made the trains run on time.

Perhaps a few emerging market economies would benefit (economically, of course) from a dictator for a few years?

Command & control at least gets things done.