UK News

Insights from the UK and beyond

from Anatole Kaletsky:

Who will get credit for Britain’s economic turnaround?

Mark Carney, the former head of the Bank of Canada who has just taken over as governor of the Bank of England, presided Thursday over his first monthly meeting of Britain’s Monetary Policy Committee (MPC). The meeting produced no change in monetary policy, yet Carney is already being hailed as Britain’s economic savior. The BBC even paid him the greatest compliment that any middle-aged white male could wish for, when it compared his appearance and hairstyle to George Clooney’s. Carney may continue basking in this adulation because he is lucky enough to be in the right place at the right time.

He has arrived at the BoE at the precise moment when the economic figures have started to suggest that the British economy is pulling out of its longest and deepest recession on record. One of the main reasons for this turnaround has been a sudden pickup in housing prices and mortgage lending, the traditional driving forces of the British economy. This improvement, in turn, has reflected a bold new government-backed borrowing program, whereby the British Treasury is guaranteeing up to £600,000 of new mortgage debt for anyone who can put up 5 percent of equity into buying a home. While this audacious policy attracted surprisingly little attention in the media when George Osborne announced it in his March budget, British homeowners and bankers were quick to catch on. As a result, house prices are rising rapidly across Britain, mortgage lending has rebounded to its highest level since the Lehman crisis and homebuilders’ shares have almost doubled. And all this is before the government incentives are expanded from newly-built houses to secondhand properties and remortgages in January 2014. For the moment, house prices are being bid up by cash-rich buyers who are front-running the government subsidies, in the confident expectation that a full-scale property boom will begin in 2014.

Given the powerful response to the government’s mortgage subsidies, the additional quantitative easing that was widely expected from Mark Carney’s “monetary activism” may no longer be required. It may be enough for the BoE to provide commercial banks with liquidity to finance the government’s planned credit expansion and to keep short-term rates near zero. Instead of trying to persuade the hawks on the MPC who repeatedly thwarted his predecessor Mervyn King’s requests for more QE, Carney may succeed in reviving the British economy simply by making a few speeches -- the “forward guidance” he used in Canada to convince investors that interest rates would stay near zero for several years ahead.

But what will the impact be on the British economy if Carney and Osborne manage to generate a property and mortgage boom? Refloating the economy on a wave of property appreciation and mortgage borrowing would return Britain to the debt-driven, consumer-led growth of the pre-Lehman period. It would mean abandoning the “structural rebalancing” from consumption and services to exports and manufacturing that Mervyn King believed was essential to Britain’s economic rehabilitation. But King’s views are no longer relevant -- and his record of economic management suggests that a degree of skepticism about his analysis may be in order.

from Breakingviews:

UK’s big build dreams still dogged by past binge

By Ian Campbell

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

The UK government wants austerity to pave the way for bold modernisation of Britain. In reality its cuts don’t reverse the previous explosion in government spending and there isn’t much money for its big infrastructure dreams.

from Chrystia Freeland:

Mysteries of the middle class

If you are worried about the Western middle class - and we all should be - you may have started to have some doubts about the virtues of flexible labor markets. In theory, flexible labor markets should make our economies more productive, and all of us richer, by making it easier for people to do the work the economy needs and to stop doing the work it doesn't.

In practice, though, some economists who once championed flexible labor markets without reservation, like Daron Acemoglu of the Massachusetts Institute of Technology, have begun to have second thoughts. Acemoglu doesn't doubt the positive economic effects of flexible labor markets, but he has begun to be concerned about their political and distributional consequences. They might help the economy grow overall, but they may also be contributing to the hollowing out of the middle class by weakening its political bargaining power.

from The Great Debate:

A fragile peace with Taliban if school attacks escalate

In the week in which America opened the door for negotiations with the Taliban, three bloody massacres of school children -- shot down simply because they wanted to go to school -- raise grave questions about what kind of peace the Taliban offer.

Within days of the initiative for talks, the Taliban shot to death nine foreign tourists encamped on the peak of Nanga Parbat in northern Pakistan, saying the murders were in retaliation for a drone attack that killed one of their leaders. But what kind of justification can possibly be offered for the firebombing of a college bus carrying forty girls from their Quetta campus in Pakistan? Fourteen defenseless girls died in the bombing; eight more people died when the terrorists ambushed the hospital.

from The Great Debate UK:

Expect no immediate fireworks from Mark Carney

--Darren Williams is European Economist at AllianceBernstein. The opinions expressed are his own.--

On July 1, former Bank of Canada Governor Mark Carney will replace Sir Mervyn King as Governor of the Bank of England. For many observers, this will herald a new dawn in the conduct of British monetary policy. The process, however, will be more evolutionary than revolutionary.

from Nicholas Wapshott:

David Cameron takes on the tax havens

There is nothing more likely to spark anger than an unfair tax regime. The American Revolution was founded on it. So the discovery that some of the largest and most successful companies in the world -- among them Google, Apple, Amazon and Starbucks -- have legally minimized the tax they pay, sometimes to as low as zero, in many nations in which they earn the lion’s share of their revenue is causing considerable irritation.

The result was evident at the G8 meeting in Northern Ireland, where Britain’s conservative government, chairing the conference of the world’s richest nations, put making corporation tax fairer at the top of its agenda, after the civil war in Syria. David Cameron, who like most conservatives believes in low taxes, is in a bind.

from The Great Debate UK:

Don’t cry for me RBS

"Don't cry for me, RBS" could certainly be the lament being sung by Stephen Hester, outgoing CEO of bailed out Royal Bank of Scotland, after the shock announcement that he will have left the bank by the end of this year. CEOs of banks come and go; however, the government stake in RBS makes this CEO particularly important.
There are two things that make Hester’s departure fascinating: firstly, the fact that the RBS board along with the Treasury have concentrated on how a new leader is needed to privatise the bank. Secondly, the fact that Hester doesn’t seem to want to go.

During an interview with BBC Radio 4 less than 24 hours after the announcement was made, Hester admitted that he wanted to take the bank through its privatisation process “for me that would have been the end of the journey.” However, that was not meant to be, and he said he “understood” that “new blood” at RBS was a good thing.

from Breakingviews:

Carney in doesn’t mean pound down as QE heads out

By Ian Campbell

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

Is Mark Carney really Mr. Easy Money, about to devalue the pound in a bid for growth? The incoming head of the Bank of England has spoken of the need to attain “escape velocity”. But the logical deduction - that he will open the monetary floodgates and send the pound down to $1.40 - ignores the latest economic news and the new international mood on monetary policy.

from The Great Debate UK:

Do you want shares in RBS and Lloyds?

By Matt Scuffham, UK Banking Correspondent.

The government should hand most of its shares in Royal Bank of Scotland and Lloyds Banking Group to the public, an influential political think tank says, in what would be the country's biggest privatisation.

The proposal would enable 48 million taxpayers to apply for shares at no initial cost and with no risk attached, the think tank said. A 'floor price' would be set and taxpayers would make a profit on any rise in the shares above that level.

from The Great Debate UK:

How will the privatisation of RBS and Lloyds affect gilt supply?

--Sam Hill is UK Fixed Income Strategist at RBC Capital Markets. The opinions expressed are his own.--

The return of RBS and Lloyds to the private sector is moving up the agenda but as the UK government prepares to set out the strategy for privatisation, the spotlight will, once again, fall on the gilt market and the public finances.

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