The UK Budget and the Economy

The key to understanding the impact of today’s budget on the real economy is found in the Chancellor’s comment right at its beginning that it would be a ‘fiscally neutral’ budget.  In short, that means that whatever measures he introduced to, say, cut taxes or duties would be exactly offset by others that increased revenues or reduced spending.  On balance, no net direct impact on total demand over the planning horizon of five years up to 2017/18, but perfect for the next election.

If you look at the Treasury table that analyses the net affect of all today’s measures http://www.hm-treasury.gov.uk/budget2013_policy_decisions.htm, you will see that in this year there is actually a net withdrawal of money to the tune of £1.3 billion mainly driven by spending cuts.  Even though he has removed the fuel escalator due in September and given something back to beer drinkers, the Budget for this fiscal year will contract the contribution of government spending on the economy.  In 2014/15 as many of the measures announced today come into effect such as the Employment Allowance of £2000 and various measures for home-buyers this becomes a net input to the economy of £1.6 billion.  In the following year, as the new Child Care scheme starts to be phased in, there is a net injection of some £2.8 billion.  In the following two years we return to withdrawals of £1.7 billion and £1.3 billion per annum.

One objective the Chancellor has achieved is

RBS - the price and everything, the value of nothing

So, the market is continuing to try and work out the value of RBS in light of their results published last week.

The RBS interpretation was that they were on track for re-building the bank.  Their share price had been improving over the last year as they gradually started to address their ills under new CEO, Stephen Hester.  He pointed to the improving 'under-lying' profits of their 'core' business' as an indicator of good things to come.  This seemed to confirm the idea that the bank would be ready to re-privatise over the coming 12 to 18 months.

The fact that there had been a fairly small improvement in operating profits, was not good enough for the markets.  That profit was turned into a huge net loss after adjustment for a variety of fines, provisions and adjustment for market based credit spreads.  And it is this net profit that seems to have driven market sentiment since last Thursday's figures.

The gap between the RBS share price and the target price of £5.00 that most feel would be needed to justify a re-privatisation has been widening.  Last Wednesday's price had been hovering around £3.45 for some time and had actually been rallying in advance of the results.  The disappointment of Thursday saw an immediate down grade as the results were released and have fallen even further threathening to fall back below £3.00.

Their share price needs to surge by 66% over the coming year to make it a real candidate for re-privatisation or at least need to be in sight of that price to announce a sell-off.  If last week's results were meant to show that there was light at the end of the tunnel it must be disappointing to all involved that the market decided to make the size of the task even bigger.

 

RBS - A tale of two banks

Today’s results for RBS were very much a tale of two banks.   Operating profit up from £1.8bn in 2011 to £3.5bn, but net profit showed a huge loss of  £ 5.2bn which was in excess of the expected £3.5bn loss that analysts had been predicting.  CEO Steven Hester will be hoping people will focus on the good news – that under his guidance ‘new RBS’ is improving and moving towards a better future.  But early signs suggest the markets have focused on the losses of ‘old RBS’ – losses created by adjustments to loan values, mis-selling compensation and fines that are the legacy of the pre-crisis world of finance.  In immediate trading after the announcement, their share price fell by more than 3% to some £3.35.

So, what are the issues behind these figures?

The UK grew in Q3 - by 1%

The release of today’s GDP figures will basically allow everyone across the political spectrum to tell the story they wish to tell.

Growth is back.  After 3 quarters of contraction or, as we economists like to call it, ‘negative growth’ we are back on track to expand.  Well, yes and no.  A 1.0% bounce is great news, but not quite enough to completely wipe out the losses of the last year: in Q3 2011, the index of GDP stood at 103.1 and is now 103.  If I were an Olympian having struggled and pushed myself through 12 months of hard training and effort I’d be disappointed not to have improved my performance even if recent training has been ‘going really well’.

The story of the last 12 months is one of flat activity.  Hmmm.  Not so great then.

The winners in the economic race for a turnaround performance

It's my party .....

The Greeks must feel like they have accepted an invitation to a party that nobody wanted them to turn up to.    They have spent a long time getting ready and even brought a bottle of their favourite wine with them, but the host has turned his nose up at the wine (well Retsina is perfect while on holiday on the Aegean but loses its appeal in cooler northern climes) and explains that it’s not a fancy dress party afterall!  Oops!  Nobody is quite sure how to fill the awkward silence that follows.

A year ago it was not an option that Greece should leave the Euro.  The political leaders of the Eurozone

Bad News for the UK from the OECD

The OECD have today warned that the UK economy will contract marginally in Q4 of this year (by some 0.1%) and will further fall in Q1 2012 (by 0.6%) and so enter a second period of recession.  See OECD predicts recession for more details.

Clearly the Ezone crisis will have a decisive role in the OECD downgrade, but it is also clear that the Chancellor has been following a high risk policy approach at a time when high risks are to be avoided.  His main risk is of front loading spending cuts during the Parliament as the central plank of his fiscal consolidation plan.   At a time when the private sector has been finding it hard to regain its growth momentum, the huge cuts in public spending are expecting businesses to find even more ways to expand to make up for the cuts.  Not only do they need to find sales to make up for what they lost in the recession, they have to make good the loss of spending power in the economy driven by spending cuts.

Should this come as a shock that has been brought on by feckless management of the EZone crisis?  Well, not really.

India in transition

I have just returned from a short business trip to Mumbai, India.  The client is a domestic bank with a short history but impressive plans to grow within the Indian retail market.  I must say the relationship has taught be much about what in the West is often described as an emerging market – frequently with little knowledge beyond hearsay behind the realities of the situation of the economic prospects for the country.

I return from this assignment with one major impression of the warmth and energy of the senior management team.  They were open to new ideas and generous in their hospitality.  They are proud in the achievements of their country: proud too of the contribution they can make to its continued growth, development and increasing prosperity.  It is a welcome evidence of pride not just – as they said – in ‘the money’ but in the economic welfare of the economy.  Something that does not seem to pervade the wider global banking industry at present.

A second issue that surprised me was