The deadline for entries into the Tory leadership race is this evening, though we don’t think we’re getting any last minute contenders. The favourites have started setting out their stalls, with Boris promising tax cuts for a few million people by raising the 40% threshold from £50k to £80k call us cynical, but we’d imagine this is aimed squarely at the 140,000 or so Tory members that will be casting the final vote – he’s preparing to spend the £39bn he’s not going to pay the EU if we leave. Sajid Javid has taken the ‘end to austerity’ route, pledging billions for education and a splurge on tech spending to avoid a hard border with Ireland. Outsider, Rory Stewart, has said that he doesn’t think we’ll get any other deal with Europe than the current offer on the table, so instead, he wants to create a ‘citizens assembly’ that would steer parliament on what Brexit should look like and then allow parliament to go and get it delivered. He’s also talking more fiscal prudence than the others, which might keep him in the race a little longer still. Michael Gove has spent more time defending his behaviour in the ’90s than he was talking about policies. We’ll see how long he can last in the race.
Sterling’s still not enjoying the whole situation. In addition to a leadership race with very different approaches to Brexit (and therefore plenty of uncertainty) we’re also not performing brilliantly from an economic perspective either: Manufacturing has slipped to its lowest level in two years, though predominantly because businesses have stopped stockpiling ahead of Brexit, which means winding down their current inventories to sensible levels – this may just be a blip in an otherwise fairly stable trend, but stockpiles aren’t just created overnight and they’re not just sold down overnight either, so we could see a few more months of this, which would keep the Pound firmly on the ropes.
The only ‘upside’ for the Pound might be that we’re less likely to cut rates as soon as the ECB and the Fed. The Bank of England’s chief economist has gone as far as to say that we’re going to need to raise rates again. Andy Haldane talked about needing to “nip any inflationary risks in the bud”. His is an outlying view within the BoE, but with the Fed looking at a potential July cut and the ECB softening their stance by the day, even if we stay put then the Pound will increase its yield versus the Euro which might give it half a chance of not falling to record lows.
The ECB’s position isn’t entirely clear at the moment: Mario Draghi has said that rates will stay at their current levels until at least next year, but with his tenure almost up, markets are starting to plan past him. There isn’t the conviction yet that a rate cut or fresh round of asset purchases is a done deal, but as the Euro strengthens on the back of the procrastination to cut, so the case to take a softer tone becomes more compelling. A couple of months of weak European growth numbers could easily see some movement at the September meeting.
The Fed’s predicament on rate cuts is tricky: Tariffs are going to raise inflation, whilst also potentially threatening the economy. They want to cut rates to give them some comfort that they’re doing what’s needed to avoid a recession, but at the same time, they’re fuelling the inflation element. Goldman’s estimate that if Trump were to go back to his tariffs against Mexico up to the full 25% then inflation in the US will rise by almost 1% – add to that a rate cut and US inflation pushes past 3% and that starts to get uncomfortable to manage with super low-interest rates. The FT has an interesting piece.
Trump has, for now, scrapped his tariff plans against Mexico, claiming a ‘huge win’ for the US. These claims are being disputed, as much of what Mexico has agreed in order to avoid tariffshas previously been pledged. Mexico is going to send more of their troops to the southern border as well as accepting back deportees from the US more readily. Unsurprisingly this is not without controversy and has already been picked apart by Democrats and the Press.
The G20 meeting over the weekend gave us a couple of predictable outcomes and a couple from leftfield: A predictable one is the fear that escalating trade tensions are bad for business and pose the big risk to the world economy. A less predictable one is that they’re going to work together to try and get more universal taxation in place for digital giants, which would supersede Philip Hammond’s own tax agenda and would likely mean these companies paying hundreds of millions more in tax each year. A nice idea, but we imagine the US having something to say about this. The FT has the detail.
Another left-field outcome was the naming of an ageing population causing risks to economic growth: rising healthcare costs, longer living and a shortage in labour all contribute to significant costs to economies. Japan’s message (based on first-hand experience) is to get ahead of this and plan for it now before it happens because unless you’re a very rich country this poses huge problems.
Looking at this week: There’s a good amount of economic data spread throughout the week – UK industrial production, unemployment, GDP. US inflation, retail sales and European inflation numbers. This will still play second fiddle to US tariff talk, but in the (hopeful) absence of The Donald we do have something else to fall back on!