UK economic growth
For years, the UK has added more jobs than almost any other country in the rich world even as real incomes plunged thanks to underwhelming productivity growth. Now it seems that a new burden has been added: disinflation. Prices are just 0.5 per cent higher than a year ago. The BBC’s Robert Peston worries that this “is not much of a buffer against deflation” and that “if we became accustomed to prices falling as the new norm, we would spend less – in that delaying would always make our money go further. And then the economy would sclerotic and stagnant, and desperately difficult to reinvigorate.” Given that UK household debt is already staggeringly high relative to income and projected to rise much further, that could pose serious problems down the road.
Our headline is the same question you could have asked of Moody’s back in February… The UK lost its second AAA rating on Friday night after Fitch cut its rating to AA+. The outlook’s stable. S&P is now the only one of the big three giving Britain a top rating. The rationale from Fitch:
Weekend headlines from the FT and other UK media:* From The FT,- Nokia investors burn their fingers- Private investments show Sir Terry Leahy’s life after Tesco- Fracking poses threat to exploitation of shale gas- Verizon solution key to Colao’s reputation- Celebrated gastropub falls victim to rebranding- Anger over Vodafone Egypt link to revolt- Hyundai’s name in lights at Piccadilly- Southern Cross chiefs netted £35 million
Britain and the Netherlands have vowed to take Iceland to court over €4bn ($5.8bn) lost in the failed Icesave bank after a deal to repay the money was rejected for a second time by Icelandic voters in a referendum, the FT reports. The result represented an act of defiance by Iceland’s crisis-hit electorate, with nearly 60 per cent voting against the deal in spite of warnings that a No vote could disrupt the country’s economic recovery and scupper its bid to join the European Union. The British and Dutch governments made clear there was no room for further negotiation with Reykjavik, setting the stage for an international court to decide who is responsible for foreign deposits lost when Iceland’s banking sector collapsed in 2008. The dispute involves money deposited by British and Dutch customers in the Icesave unit of bankrupt Landsbanki. They were reimbursed by domestic deposit insurance schemes, leaving the UK and Dutch treasuries out of pocket.
All eyes on the Bank of England ahead of Thursday’s rate decision. With inflation persistently above the Old Lady’s target, and with a couple Monetary Policy Committee members voicing their dissent over recent rate decisions, there’s an ever-so-slightly heightened chance of a hike. Still though, the vast majority of BoE-watchers expect the central bank to stay on hold. To that end, CreditSights have a Thursday note out on the relationship between the UK economy and interest rates.
Highlights from Monday’s FTfm. UK pension funds come to the rescueLocal authority pension funds are stepping into the breach to help fund some of the infrastructure projects in danger of being axed due to the UK’s clampdown on public spending.
Nomura’s analysts had some sort-of good news for UK banks on Monday: UK banks are benefiting from a combination of declining impairments, rising margins and strengthened capital bases. The domestic banks are trading on valuations at or below book value. In the past, UK banking has proved a profitable industry and could be expected to be so again, as long as economic recovery continues, even if future returns are well below those achieved in the past cycle…
The UK’s economic recovery is at risk if the nation’s banks do not move swiftly to raise the £750bn-£800bn needed to refinance their borrowings due by the end of 2012, the Bank of England will warn on Friday. UK banks have greater refinancing needs over the next two years than lenders based in the US, Germany, France or Italy, according to the BoE’s Financial Stability Report, the FT says.
UK government bonds and sterling fell early on Friday as investors worried about the prospects for economic recovery under a hung parliament and contagion affects from the US and Europe, the FT reported. Early optimism on the results from the UK general election faded as the FTSE 100 fell by more 1 per cent in opening trade after the sharp falls in US stocks, while gilts and sterling also remained under pressure from the European sovereign debt crisis.
It’s time to forget the financial and macroeconomic crisis, and worry about the fiscal one. So says Moody’s in the latest edition of its AAA Sovereign Monitor, which looks at eight of the countries rated AAA by Moody’s, but four of the largest in particular — France, Germany, the US and UK. Moody’s has to date only downgraded one sovereign (Ireland) so this is a rather timely publication given recent concerns over sovereign debt and ratings — concerns aptly summed up in the below, mostly downward-pointing, Moody’s chart:
Here’s an alternative view on the UK economy from ResearcH2, the analytical arm of real-estate advisers BH2. The team there has long presented a defence of the UK economy, saying the length and depth of downturn has been way overstated by commenters. This time round, however, the team believe popular opinion has turned too far the other way.
Wednesday brings news that UK unemployment rose less than expected in May while average earnings, including bonuses — still to be had apparently — grew by 0.8 per cent year on year in the three months to April. That said the unemployment rate at 7.2 per cent was still at its highest for more than a decade:
Oh boy, is Gordon Brown in trouble. The parliamentary expenses scandal in Britain may have distracted the public’s gaze from the dire state of the local economy, but rating agency Standard & Poor’s has now guaranteed its return to the front pages.
The IMF urged the UK government on Wednesday to act faster once economic recovery was underway to rein in public finances by cutting public spending plans or raising taxes. Warning that the UK’s current policy package hinged on “continued trust in the sustainability of the fiscal position”, IMF officials urged the government also to specify how it planned to limit public spending, to allocate any surprise tax revenue growth to deficit reduction and to build a broad public consensus for bringing the books closer to balance.
UK chancellor Alistair Darling on Wednesday gambled on a rapid economic recovery and deep spending cuts to regain control of public finances ravaged by the global financial crisis. In an austere Budget that raised taxes on the rich and nearly halved planned spending growth, Darling told parliament that the public finances would not recover to comfortable levels until 2017-18 after borrowing surges to £175bn this year. The UK economy would contract by 3.5% in 2009 but rebound quickly thereafter, he said.
Lloyds TSB insisted Tuesday that it saw no need to strengthen its capital base as the banking group claimed it could continue to grow despite the economic slowdown in the UK. The lender, which has suffered less from the credit crisis than its UK rivals, said it was taking market share from competitors in areas such as mortgages and savings while also benefiting from better margins. Nevertheless, Lloyds wrote off £387m before tax in the first quarter as turmoil in the credit markets knocked the value of asset-backed securities on its balance sheet. The bank also reduced the value of assets in its “available-for-sale” reserves by £740m, taking the portfolio down to £23.2bn. Analysts predict that Lloyds’ dividend may come under pressure as a slowing UK economy and rising bad debts squeeze its profits.
Both Barclays and RBS are vulnerable to an economic downturn in the UK, say analysts at Citi, envisaging a £6bn equity issue from Barclays and more than double that – £12.5bn – for RBS in the not too distant future. Dividends from both banks too are looking “less secure”. A prolonged downturn in the UK economy will “leave management with a limited range of alternative options.”