The Great Debate UK

from MacroScope:

The IMF to turn on the rich

The latest International Monetary Fund meeting ended with emerging market powers getting a pledge from the organisation for stronger and "more even-handed" scrutiny of what is going on in large advanced economies.

As Reuters correspondents Lesley Wroughton and Emily Kaiser report here, the decision is a response to long-running frustrations among emerging economies, which reckon the Fund has  not been tough enough on its biggest shareholders, led by the United States.

The move reflects a number of things. First, it shows the growing clout of emerging economies within international institutions. The G-20, for example, is arguably now more influential than the old , richer G7. Secondly, it graphically underlines the current world-turned-upside-down state of the global economy, in which profligate rich economies are struggling to keep above water while supposedly poorer and less-developed ones enjoy solid growth and relatively stable finances. This graph makes the point:

One question  that has been raised, meanwhile, is whether the IMF is capable of taking rich countries -- its primary paymasters -- to task.  A comment from a craigbhill on the Reuters story encapsulates the issue:

This is like the bankers to the Mafia being politely asked to "give scrutiny" to the Mafia.

A bit harsh. But valid?

from Summit Notebook:

Is emerging Europe out of the woods yet?

A surge in portfolio inflows is flooding into emerging central Europe, although yield-hungry investors are picking solid policy and higher growth over countries still struggling to put the crisis behind them.

After deep contractions across the region, a two-speed recovery is underway, with countries boasting better debt fundamentals like Poland and the Czech Republic for the moment ahead of those who depend on foreign lending.

Investors are also dipping into countries like Hungary, but struggles by the new centre-right Fidesz government to get its budget deficit under control mean it is lagging for now, along with fellow International Monetary Fund benefactor Romania.

"There has... been clear differentiation between the more robust and the weaker economies of the region," Goldman Sachs wrote in a research note on the region.

"We believe that the region's stronger economies -- namely, Poland, Turkey, Israel and the Czech Republic -- will be the first to see an acceleration in financial inflows both in debt and, increasingly, equity." Turkey and Israel are often grouped with emerging European markets.

Extremely easy monetary policy in the world's developing economies, including expectations the Fed will push ahead with more asset-buying, plus continued worries over debt in troubled euro zone countries like Greece and Ireland have helped push investors into these higher-yielding countries.

But these new, more volatile, portfolio flows carry risks.

from MacroScope:

Investment week: Punch drunk and hard to startle

This week’s rehashing of European banking concerns – related variously to the Basel III impact on German banks, the ongoing morass re Anglo Irish Bank or any other scare story you want to exhume -- provided the latest excuse for a global markets wobble as September kicked off. Yet, with some justified head-scratching over what really was new to the world this week as opposed to last week, price moves showed little conviction. Most losses were quickly recouped and decibel level of the commentariat, still frantically competing to warn you of the next disaster, toned down.

The world’s major sovereigns and banks have big financial problems, no doubt, and Europe more than its fair share. The rescues of the Spring did not provide a silver bullet and genuine repair will likely take a painfully-long time. But we’ve also had a lot of time to adequately discount these risks and the marketplace at large is already positioned extremely cautiously. That's why the idea of sudden, blind panic on these long-running sagas seems just a little OTT – especially against a relatively stable, if bruised, economic backdrop. The bigger issue many investors are grappling with is the growing difficulty in making money in a hyper-cautious, low-growth environment. Ask Stanley Druckenmiller. If he threw in the towel because money-making conditions are just lousy, then you can be sure others see the same. Anecdotally at least, pressurised hedge funds – who faced rising redemptions through the summer – are ultra-cautious about open positions and seem quick to cut and run on even the slightest gain, long or short. (A bit like continually shouting 'bank!' on reaching £100 pounds on The Weakest Link!) Big institutional funds, meantime, are sufficiently uncertain about the market and economic direction that many are already keen to lock down for the remainder of the year and are hugging benchmarks to preserve whatever capital they have without resorting to zero-yielding cash or barely-more-attractive TBonds. U.S. midterms in November only add the caution. In short, it will take a pretty major positive or negative surprise to truly set these markets alight and there is every chance we won’t get a decisive one for some time.  We already have historically high vol and caution – but relative steady, unspectacular conditions for all that. The smart money may simply be tempted to buy or sell any hysterical extremes. Is may even be possible that some are tempted to foster a long-absent patience gene?

As to next week? There's welter of new economic data to maybe add some flavour. The biggest potential movers are August China production and investment stats (now, oddly, being released Saturday rather than Monday) and then US retail sales, Philly Fed and German ZEW indices later in the week. On the issue du jour re European banks/sovereigns, an informal EU summit on Thursday provides the main set-piece – but BIS central bankers meeting in Basel this weekend and Spanish and Italian debt auctions next week may add their own spice.

The Japanese yen intervention theme will likely rumble, with the Japanese Democrats leadership poll and BOJ Tankan playing a part. China will also likely find renewed political heat stateside, as the US election campaign adds an edge to a congressional hearing on China’s FX policy on Wednesday as well as the monthly Treasury/TIC flow data. All the above have their own ability to surprise -- but few seem game changers in themselves.

Friendly Cameron and King get mix right for now

By Ian Campbell

–  The author is a Reuters Breakingviews columnist. The opinions expressed are their own –

Just in government and David Cameron’s relationships are in question. Eyebrows have been raised about the prime minister’s friendship with an Old Lady, sometimes known as the Bank of England. The affection appears reciprocated by Mervyn King, the Bank’s governor. But to think the Old Lady’s independence is compromised is probably to take things too far. The bank’s current low interest rate policy looks more than just a political favour.

The overly friendly talk has arisen because both sides have made comments that might be deemed injudicious. King appeared in May, before the election, to give his backing to Conservative fiscal tightening plans. Cameron, meanwhile, has often mentioned how he thinks tight fiscal policy should allow interest rates to stay lower for longer. The new government has also fixed up the Old Lady with greater supervisory powers.

Could this chumminess lead to the wrong monetary policy? King’s critics might think so. Inflation is 3.4 percent, well above the 2 percent target. Andrew Sentance, one of the monetary policy committee (MPC) members, voted for a rate increase in this month’s meeting. Adam Posen, another MPC member, acknowledged “a direct difference with the governor” on one thing. He sees not just one-off inflationary factors but also a slight “unanchoring” of inflation expectations. And yet Posen also sees the UK poised between two very different outcomes — either recovery or “the renewal of a severe recession”. Similarly, David Miles, a third member of the MPC, believes that now is not the right time to raise rates even though inflation is “uncomfortably” high.

The great uncertainty means no conspiracy theories are required to explain the MPC’s position. There can be little doubt King approves of the coalition government’s plans for fiscal tightening. The VAT increase may make inflation worse. Not for nothing, perhaps, was it deferred to January. But the overall initial impact on growth of fiscal tightening is likely to be negative. If government departments do indeed slash budgets by a quarter, unemployment may rise a lot. Private sector wages are already depressed. Big cuts should bleed inflation painfully away.

Fiscal tightening is essential. And low interest rates themselves look essential — to avert the nastier of Posen’s outcomes. The UK is getting the policy mix it needs.

Cameron tasked with changing Brits’ expectations

– Mark Kobayashi-Hillary is the author of several books, including ‘Who Moved my Job?’ and ‘Global Services: Moving to a Level Playing Field’. The opinions expressed are his own –

After thirteen years, it’s all over. The New Labour project is dead. Or is it? Tony Blair brought British politics to the centre-ground and ensured that a single party could support free-market economic policies as well as social justice.

And that’s what most people want today, a government that can help the citizen without hindering the economy through the dogma of dated ideology. The old notion of socialists waging war on small-government-right-wingers feels somehow quaint. Clearly Tony Blair knew that David Cameron would be his successor in the New Labour project, but nobody told Gordon Brown.

Now the back room deals have been done between the Conservatives and Liberal Democrats, and the cabinet post announcements are being released from Downing Street, the real work has to begin. I don’t just mean the public sector cuts. Any new government would have to cope with the deficit, though many in Labour are probably grateful that it’s the Tories who are going to be seen slashing public services.

I mean that we need to change the attitude of a generation that has only known affluence, constant growth, and easy borrowing secured against property that has only ever increased in value. British people are going to have to spend within their means, no matter how unfashionable that might seem in a society obsessed with the latest dress or jewellery worn by Cheryl Cole.

The boom of the eighties led to a mighty recession, yet memories of that time feel mild compared to recent events. Many high street banks in the UK remain in public hands and when they are returned to the private sector will they ever really be private again, or will they continue to operate safe in the knowledge that the government safety net will always be there to stop their fall? It seems that banking may have changed forever.

And don’t forget that much of the nineties now resembles a dream. A popular American president, the emergence of a popular British leader, the growth of the Internet, and constant economic growth that had apparently led to the death of the boom and bust cycle. The dot com crash felt like a blip to most property owners.

Britain’s economy should learn to speak a little Chinese

- John Ross is visiting professor at Shanghai’s Jiao Tong University where he writes a blog on globalisation. The views expressed are his own. -

The success of China’s economic stimulus package has attracted increasing attention in Britain and internationally for two reasons. The first is simply its importance for the world economy. Second whether there are general lessons to be learned.

The impact of China’s economic programme can be seen in that it is likely the whole of world economic growth this year in net terms will be accounted for by China.

The sceptics on China’s stimulus package have been disproved by the facts. China’s GDP growth this year will be eight percent or slightly above. China’s GDP grew by 7.9 percent year-on-year in the second quarter and was accelerating –- the best private sector estimates are China’s economy grew at an annualised 13-15 percent in the second quarter. Urban investment increased 34 percent and as producer prices were dropping the real increase was probably around 40 percent. Retail sales increased 15 percent.

This is a stellar performance in conditions where most major world economies will shrink this year. Compared to these results talk of possible “green shoots” in other economies relates to minor improvements.

China’s economy is not large enough that its growth is able by itself to turn round the world economy. But it is sufficient to having a stabilising effect in East Asia with beneficial knock on consequences. Those wanting further detail on the scale of contribution of China’s growth to the world economy should read Professor Danny Quah, of the London School of Economics’, excellent recent paper on Asian growth.

But if the significance of the scale of the international impact of China’s economic performance is evident are there policy lessons which can be drawn by Britain?

Tough year ahead for UK plc – but longer term future sound

Peter Hemington is a Corporate Finance Partner at BDO Stoy Hayward. The views expressed are his own.

Over the past few weeks several business surveys, including our own BDO Business Trends report, have painted a very gloomy picture of the UK economy. Short and medium term business confidence continues to plummet as the credit crunch takes its toll on unemployment figures, the housing market, the ability or desire that banks have to lend and consumer spending.

But despite this, the UK has some short term positives that we should not forget – low interest rates and inflation, plus a relatively flexible labour market. Additionally, although public sector borrowing is clearly running at too high a level, the ratio of national debt to GDP ranks somewhere in the middle amongst high income countries. So perhaps the UK’s credit is better quality than some commentators have suggested. And despite an equally gloomy outlook for the employment market – highlighted by this week’s announcements about two big names from the high street, Woolworths and MFI, going into administration – the unemployment figure is considerably lower than it was at the onset of the last recession.

Low interest rates and inflation, relatively low unemployment, not such a bad fiscal position – perhaps overall we could be in a stronger position than we were in 1991.

As for the longer term, it’s worth remembering that Goldman Sachs suggested not so long ago that the UK’s per capita GDP could catch up with that of the USA within twenty years or so. No doubt a part of this was extrapolation of historic trends. But these trends are based on some strong fundamentals. The UK is a free trading nation strong in sectors, such as financial services, which will grow their share of world GDP in the longer term. Foreigners come to the UK to do business because they trust our legal system and our government institutions. They will continue to do so and this will continue to generate income for the British economy.

2009 will undoubtedly be an uphill struggle for businesses, but the foundations described above should provide longer term solace for UK businesses as they try to predict what the future has in store for them.