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A personal view from Ian Stewart, Deloitte's Chief Economist in the UK. Subscribe to & view previous editions at: http://blogs.deloitte.co.uk/mondaybriefing/
The latest Deloitte survey of UK Chief Financial Officers, released this morning, shows a rebound in optimism after the sharp decline in the wake of June's General Election. Perceptions of uncertainty have declined and are running at almost half the levels prevailing after last year’s EU referendum.
Concerns over Brexit have eased, with 60% of CFOs expecting the UK’s exit from the EU to lead to affect the business environment adversely, down from 72% in June. Nonetheless, Brexit tops the CFO risk list and almost a third of CFOs expect it to reduce their investment in the next three years.
CFOs rate weak UK demand the second greatest risk, with prospects for higher interest rates in third place. In the light of recent hawkish comments from the Bank of England Governor, Mark Carney, CFOs have brought forward expectations for a UK rate rise and 92% expect base rates to be higher than their current 0.25% level in a year’s time.
UK inflation has surged in the last 2 years, from close to zero to approaching 3.0%. Surging inflation has put pressure on profit margins with CFOs report that cost pressures are running at the highest level in more than six years. While optimism and expectations for revenues have recovered from last year’s lows, profit expectations continue to languish.
UK businesses are rather more upbeat today than three months ago and see fewer risks in the world. Nonetheless, perceptions of uncertainty are elevated and Brexit remains a major worry. With margins under pressure CFOs are operating cautiously. It is a testament to the changeable business environment that eight years into the recovery cost control is the top balance sheet priority for major UK corporates.
To read the full report and download the survey data please click on the link below:
In four weeks’ time the Bank of England is likely to raise UK interest rates for the first time in ten years. The Bank’s Governor, Mark Carney, has gone out of his way to signal that a rate rise is on the cards. Financial markets and economists are betting that the Bank’s Monetary Policy Committee will hike by 25 basis points at their 2nd November meeting, taking UK interest rates up to 0.5%.
Other central banks are also edging away from ultra-easy monetary policy, with America leading the way.
The Federal Reserve has raised US interest rates from 0.25% to 1.25% over the last two years. Later this month the Fed will start unwinding its Quantitative Easing (QE) programme. Canada raised rates in July for the first time in seven years. The European Central Bank is a lot further from raising rates, but it is upbeat about prospects for euro area growth and later this month will announce how it plans to unwind its programme of QE.
The Fed and the Bank of England have shared motives for raising rates. Asset prices and consumer borrowing look frothy in the UK and US. Both countries are more than eight years into their recoveries. Raising rates now hardly seems premature and would provide headroom for future rate cuts when, as is inevitable, recession strikes again. Wage growth is subdued, but unemployment in most of the Anglophone world is at historically low levels, pointing to future inflation risk.
In the UK Mr Carney argues that Brexit is likely to slow UK productivity, weaken sterling and raise inflation pressures.
The tilt towards tighter monetary policy brings with it new risks. The 2008-2009 monetary easing bolstered liquidity, asset prices and credit. The unwinding of easy monetary policy should have the opposite effect.
For asset markets which have become accustomed to cheap money this could be the moment of truth. In the UK and US housing, equities and bonds look demandingly priced. As the current edition of the Economist puts it, there is a bull market in everything. The US Nobel Laureate in economics, Robert Schiller, estimates that on an underlying basis US equities are more expensive today than at any time since the dotcom bubble and, before that, the 1929 crash. An index of equity market volatility, the VIX, is close to a 25 year low, suggesting a level of optimism that, to some, borders on complacency.
Cheap money has helped reboot growth and has raised household debt in advanced and emerging economies above 2008 levels. Yet growth rates for GDP and household incomes are still below pre-crisis norms. Asset valuations, and the ability of households to cope with debt, seem dangerously dependent on low interest rates. Last week Warren Buffett said that equity valuations would look cheap in three years’ time if interest rates were one percent - but not if they were three percent.
The financial crisis seemed to mark a step change towards higher levels of uncertainty and slower growth rates. A less certain world meant less risk taking and fewer big purchases. Companies and households battened down hatches, focusing on reducing their costs and building up savings.
Ten years on from the crisis we have become more accustomed, though not immune, to uncertainty. The cliché is that the only certainty is uncertainty.
Earlier this month I was on a panel with a former banker and an academic in Austria discussing the lessons of the financial crisis.
At one level the crisis was mind-boggingly complex, with obscure, linked financial structures blowing up, spreading risk through the system. At another level it was pretty simple.
Invention lies at the heart of industry and economics. The question of what systems best foster innovation and which innovations have the greatest effect on economic welfare have long occupied economists.
Over the last year the author and economist Tim Harford has presented a BBC radio series describing the fifty innovations he believes have ‘made the modern economy’.
Economists disagree on lots of things, but on one thing at least there is a consensus. Productivity, or the efficiency of production, is the main driver of human welfare. The data bear this out. Consider that growth in living standards in the UK since the late nineteenth century has been driven entirely by rising productivity. It is not surprising that improving productivity is the Holy Grail of economic policy.
With the return to work underway here’s our summary of the key developments in the global economy and in politics over the summer.
On the economic front the mood has been fairly positive, with activity nudging higher led by the euro area, Japan and emerging markets. Unemployment has fallen in Europe, North America and Japan since June. The VIX index, a gauge of financial market uncertainty, is close to a 25 year low. In the last three months global equity prices have risen by 5% and the euro by 4%. The dollar and the pound have continued to soften. Copper and oil prices rose over the summer, the later buoyed by Hurricane Harvey.
UK house prices have recovered from the slump that followed the financial crisis. According to the Office of National Statistics UK house prices have risen 45% since their trough in March 2009.
Over the same period earnings have risen by just 16% making life tougher for first-time buyers and those trading up in the housing market.
Some believe older people, and the state, have virtually rigged the system for their benefit. The titles of a recent an influential book by David Willetts, a former Conservative Minister, sums up the mood: “The Pinch: How the Baby Boomers Took Their Children's Future - And Why They Should Give It Back”.
Do you have enough leisure and free time?
If the answer’s no, you are not alone. Most of us feel time pressured and, often stressed in our lives.
On the face of it this is surprising. Most us have more free time and work fewer hours than ever.
In 2016 the average UK worker put in 266 fewer hours a year than in 1970, equivalent to reducing the working year by over seven weeks. It’s a similar story across Europe, and working hours have also declined in famously workaholic societies like the US, South Korea and Japan. In many countries, especially in Europe, holiday entitlements have also improved.
With the summer break upon us here are ten facts to sprinkle into your holiday conversations.
- There is a common misconception that for a Brit making a card transaction overseas in sterling is cheaper than using the local currency. Martin Lewis of moneysavingexpert.com reports that, in fact, it is almost always better to make card transactions in the local currency. Even if the currency conversion provider waives its commission it usually uses an exchange rate with a significant mark-up over that offered by Visa/MasterCard for sterling transactions.