MacroScope

Osborne stakes out election ground with little fiscal leeway

The annual UK budget is always a big set piece but it’s hard to remember one where there have been fewer advance leaks – indicative of a steady-as-she-goes approach by George Osborne.
Having put so much political capital into reducing the deficit, to switch now at a time when the economy is recovering strongly would be politically risky. And with debt falling only slowly there is little fiscal leeway.

That’s not to say this isn’t a big political moment. Yes there is the finance minister’s autumn statement and another budget before May 2015 elections but this is the moment when the narrative for the economy and Britons’ wellbeing is staked out.

So expect a further increase in the threshold at which income tax starts to be paid, to help the poorer, and measures to boost business investment in an attempt to rebalance the economy.
Osborne will also extend his “help to buy” housing scheme, questionable at a time when property prices are rising strongly. On the thrift front, he will announce details of a ceiling on welfare spending.

Already, the Treasury has released figures showing most workers have seen their pay rise by more than inflation in recent years, an early riposte to the opposition Labour party’s claims that while the economy may now be growing strongly most of the country doesn’t feel it because living standards are falling. Labour is ahead in the opinion polls but its lead is what pollsters call “soft”.

Osborne is also likely to herald the point at which the UK economy gets back to the size it was before the financial crisis. That could happen in this quarter or the next but it’s taken an awful long time to get there. And of course there will be plenty of blame heaped on the previous Labour government for failing to avert a financial crisis that engulfed the whole world.

Money for Ukraine?

Russia’s next move remains the great unanswered question for Ukraine but there are glimmers that things might be starting to move elsewhere.

IMF chief Christine Lagarde said last night she would send a technical support team to Ukraine soon if Kiev makes a request. It can’t do so until an interim government is formed, probably tomorrow. That would be step one, but only step one, down the road to an international aid package.

The European Union’s foreign policy chief promised Ukraine’s new leaders strong international support but offered up no specifics and there will be no meaningful bailout until after elections slated for late May although EU budget commissioner Janusz Lewandowski said bridging aid of 1 billion euros might be available.

ECB forecasts to contrast with Britain’s

The European Central Bank holds its last rates meeting of the year with some of the alarm about looming deflation pricked by a pick-up in euro zone inflation last week – though at 0.9 percent it remains way below the ECB’s target of close to two percent.

The spotlight, as always, will be on Mario Draghi but also on the latest staff forecasts. If they inflation staying well under target in 2015 (which is quite likely), expectations of more policy easing will gather steam again.

For today, another rate cut after last month’s surprise move would be a huge shock. Launching quantitative easing is anathema to much of the Governing Council unless it was clear a Japan-style downward price spiral was in the offing, which it isn’t. The bank’s vice-president, Vitor Constancio, has said the ECB would only cut the deposit rate it pays banks for holding their money overnight – now at zero – into negative territory in an extreme situation.

ECB cacophony

A round of European Central Bank policymakers speeches this week can be boiled down to this. All options, including money-printing, are on the table but it will be incredibly hard to get it past ECB hardliners and neither camp sees a real threat of deflation yet.

Reports that the ECB could push deposit rates marginally into negative territory in an attempt to force banks to lend have been played down by our sources, not least because it would distort the working of the money market.

Today, ECB chief Mario Draghi speaks at a Berlin conference. Bundesbank head Jens Weidmann, who opposed this month’s cut in the main interest rate along with about a quarter of the Governing Council, will also be there as will Angela Merkel.

Brussels looks warily at German surplus

Barring a last minute change of heart, the European Commission will launch an investigation into whether Germany’s giant trade surplus is fuelling economic imbalances, a charge laid squarely by the U.S. Treasury but vehemently rejected by Berlin.

This complaint has long been levelled at Germany (and China) at a G20 level and now within the euro zone too. Italian Prime Minister Enrico Letta urged Berlin this week to do more to boost growth.

Stronger German demand for goods and services elsewhere in the euro zone would surely help recovery gain traction. The counter argument is that in the long-run, only by improving their own competitiveness can the likes of Spain, Italy and France hope to thrive in a globalised economy.

A question of liquidity

The Federal Reserve’s decision to keep printing dollars at an unchanged rate, mirrored by the Bank of Japan sticking with its massive stimulus programme, should have surprised nobody.

But markets seem marginally discomfited, interpreting the Fed’s statement as sounding a little less alarmed about the state of the U.S. recovery than some had expected and maybe hastening Taper Day. European stocks are expected to pull back from a five-year high but this is really the financial equivalent of “How many angels can dance on the head of a pin”. The Fed’s message was little changed bar removing a reference to tighter financing conditions.

However, the top central banks have sent a signal that they think all is not yet well with the world – the Fed, BOJ, European Central Bank, Bank of England, Bank of Canada and Swiss National Bank have just announced they will make permanent their array of currency swap arrangements to provide a “prudent liquidity backstop” indefinitely.

Italy versus Spain

Italy will auction up to 6 billion euros of five- and 10-year bonds after two earlier sales this week saw two-year and six-month yields drop to the lowest level in six months. Don’t be lulled into thinking all is well.

After Silvio Berlusconi’s failure to pull down the government, Prime Minister Enrico Letta has some time to push through economic reforms, cut taxes and spending. But already the politics look difficult and the central bank said yesterday that government forecasts for 1.1 percent growth next year and falling borrowing costs were overly optimistic.

Bank of Italy Governor Ignazio Visco and Economy Minister Fabrizio Saccomanni will speak during the day.

Forever blowing bubbles?

UK finance minister George Osborne is speaking at a Reuters event today, Bank of England Deputy Governor Charlie Bean addresses a conference and we get September’s public finance figures. For Osborne, there are so many question to ask but Britain’s frothy housing market is certainly near the top of the list.

The government is extending its “help to buy” scheme at a time when house prices, in London at least, seem to be going through the roof (no pun intended). Property website Rightmove said on Monday that asking prices for homes in the capital jumped 10.2 percent in the last month alone.

The Royal Institution of Chartered Surveyors has suggested the Bank’s Financial Policy Committee should cap house price inflation at 5 percent a year. A Bank of England policymaker retorted that it wasn’t down to his colleagues to regulate prices.

A jobless guide to interest rates

The Bank of England’s decision to peg any move in interest rates to the downward progress of unemployment has invested the monthly figures, due today, with huge importance.

In a nutshell, markets don’t believe the jobless rate will take the best part of three years to fall from 7.7 percent to below 7.0, the point at which the Bank said it could consider raising rates from a record low 0.5 percent. For what it’s worth, the consensus forecast is for the rate to be unbudged at 7.7 in August.

There are some reasons to think the Bank might be right – an ageing population working longer, slack within companies (such as part-time working) which can be ramped back up again before any new hiring takes place – but if markets continue to price in a rate rise early than the Bank expects, then it has de facto policy tightening to deal with.

Can they kick it? Yes they can

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During the recent round of financial crises, policymakers have done a whole lot of “kicking the can down the road”.

The latest is taking place in the United States where a fiscal stalemate between Republicans and Democrats has forced the first partial government shutdown in 17 years.  It has also raised concerns about a U.S. debt default, should the government not meet a deadline this week of raising the debt ceiling. That has kept short-term U.S. interest rates and the cost of insuring U.S. debt against default relatively elevated.

While markets remain convinced there will be a last-minute deal – because the consequences are far to dire for there not to be – their performance has ebbed and flowed with the mixed messages from Washington.