13 October 2016
Week In Brief: BUSINESS AND THE CITY
THE BIG PUSH: There is a touch of the First World War artillery barrage in the European Central Bank’s decision to extend its quantitative easing programme beyond March if inflation does not move towards the 2% target. It doesn’t seem to be working, but what else to does? The fact that the bank controls the monetary but not the fiscal policy of the EU makes it hard to switch approach. Despite the “big bazooka”, the decision in March to expand the QE programme to Euro 80 billion a month and to cut interest rates to zero, the Eurozone economy has still not shown convincing signs of a pickup.
Meanwhile the mood may be moving against extreme monetary stimulus with Teresa May’s concern that it bears heavily on savers – and of course pension funds – now being endorsed by Christine Lagarde, the managing director of the International Monetary Fund. Her vision of monetary, fiscal and structural policies working together is unlikely to be realised in the fiscally decentralised union.
Across the Pond, progress on employment could indicate higher interest rates, something which would exacerbate pressure on sterling and discourage the Bank of England from cutting sterling rates again.
WHAT DID THEY THINK WOULD HAPPEN?: The currency markets reacted with dismay to Mrs May’s “Hard Brexit” stance at the Conservative Party Conference. Little comfort can be drawn from the reaction in Europe either, the Germans indicating that free movement of people is a red line and a stand-off on the issue is looming. It should hardly be a surprise. If we have learnt one lesson from Brexit it is that the views of political elites no longer dominate politics and that it is important to take into account the mood of populations as a whole. Will the people of Germany, a country which has looked to the UK as an ally in the EU, feel betrayed by our pending departure? Yes, of course they will. Will they want their government to tell the British that if they will not accept core features of the community such as the free movement of people and the jurisdiction of the European Court of Justice, Britain must make its own way? Of course they will. Will the German politicians temper their views to reflect that? There is an election in the offing. The markets had better get used, then, to the prospect of Britain being excluded from the market with tariffs at WTO levels. There may be horse trading later but, until then, this is the way in which all the straws will point.
NOT SO EASY: EasyJet has announced that the weakness of the pound is expected to cost it £90 million over a full year. The airline industry has also been hit by terrorist issues, and strikes by French air traffic control, with Ryanair cutting back on UK expansion and concerns about the viability of Monarch. Still, on the bright side, EasyJet’s passenger figures for the last three months are 5.8% up on the previous year, even if their revenues from those passengers have dropped
TAX BREAK: Hollywood stars may make large amounts but investment in films is proving less profitable for UK investors who hoped to get tax relief. The idea behind these investments was that all or most of the net amount injected would be covered by borrowing so that, from the investor’s point of view, all or most of the after tax cost came from the bank. Unfortunately HMRC do not agree that the tax relief was due and want to claw it back. What’s more, provisions introduced by the Finance Act 2014 mean that they can get it back provisionally before the courts have actually ruled on the schemes, leaving the investors short of the funds they need to repay the bank. All in all it should make for a bleak Christmas.
STAGS SLAIN: It’s bad luck for those who were thinking of stagging Lloyds Bank when the government sells its remaining £3.6 billion stake. The shares are now expected to be sold at 50p each, well below the 73p originally paid by the taxpayer. Originally the shares were to be sold at a 5% discount to retail investors, many of whom have registered their interest on the government website. However the Treasury’s advice is that market volatility makes a discounted retail offer undesirable and that it would be better to mandate an investment bank to sell the stake into the market. Plans to sell the government’s remaining stake in Royal Bank Scotland have been postponed indefinitely.
TRADE DEFICIT: Britain’s trade deficit rose to £4.7 billion in August, almost twice the figure for July. That is because rising imports have not, despite the collapse of the pound, been matched by rising exports. According to an expert from Pantheon Macroeconomics, the initial reaction to a dropping exchange-rate is a widening of margins on exports and an increase in the volume of exports may take two years to come through. It should arrive nicely in time for Brexit.
HOT PROPERTIES: Mobile phone manufacturer Samsung has recalled its Galaxy Note 7 model following reports that it is liable to burst into flames. Originally this was thought to be due to a fault with the battery but it has proved impossible to deal with the problem. It is estimated that scrapping the phone will cost £14 billion of sales. Customers owning one of the affected phones should exchange it for something less “hot”.
SINKING LIFEBOAT: Scarred by its experience at British Home Stores, the Pension Protection Fund has called for tighter regulation in its evidence to the House of Commons Pensions Select Committee. The trouble is that claims on the fund are generally made when there is no money in the business so that suggestions of fines etc. for the employer have little force. Perhaps more promising is the suggestion supported by Frank Field that the regulator be given more power to take action before disaster strikes. Still it is difficult to see how much can be achieved in an environment where everyone is anxious that the business should continue in one form or another. Fund manager BlackRock has warned that a number of funds are in difficulties due to the low returns on their investments.
