Economy springs a trap
LODGED as it is between vital Parliamentary votes on Brexit, the Spring Statement on Wednesday will be a low-key affair.
Philip Hammond will point to Britain’s victory against ballooning budget deficits and talk about employment. A hefty undershoot of the £25.5bn borrowing forecast for 2018-19 is certain.
The Chancellor is likely to keep the £15bn or so of extra cash behind the clock. It could be useful to smooth a hard Brexit or, if there is some kind of deal, Hammond will have a chance to start addressing some of the bottlenecks in public services left by austerity.
What makes Hammond’s task harder are broader economic conditions.
Yes, the UK deficit has been tamed, but at 82.6pc of total economic output, debt levels are still high.
There is a tendency towards schadenfreude when we look at the eurozone’s problems, and that stirs the Brexit spirits. The outsized downgrade of euro area growth by the European Central Bank for 2019 from 1.7pc to 1.1pc is a shocker. And it is not terribly helpful in that for the moment, at least, the other 27 EU nations are our biggest trading partner. The latest data from Germany’s locomotive economy shows exports down 2.6pc. It shows why the ECB has rapidly reversed course on monetary easing and is offering new help to the banks.
The other dark cloud on the global horizon is China. You can never quite be sure about the data from Beijing. But a 20.7pc drop in exports in February looks titanic.
This could be Donald Trump’s £200bn of tariffs biting, or President Xi playing some political game with Washington. What is inescapable is that China’s growth has cratered and, at 6pc, is less than half what it was before 2012. The country’s financial system is overloaded with debt, with the ratio of corporate debt to the size of its economy standing at 160pc. The worst export figures for three years sent share prices in China and across Asia down by as much as 4pc in latest trading.
The US labour market also disappointed, with just 20,000 jobs created in February. But with the jobless rate down at 3.8pc this might not be considered much of a blow. What it does suggest is that the US is coming off the boil, adding to broader uncertainty.
Britain has been defying the odds since the June 2016 referendum. Earlier this week the services sector threw up a stronger than expected number. But an open economy like the UK cannot withstand problems in the rest of the world forever. Hammond may need the extra fiscal space sooner than expected, irrespective of Brexit.
Frankfurt misery
SPECUlATIOn about a merger between Germany’s two biggest banks, Deutsche and Commerzbank, refuses to die.
Deutsche chief executive Christian Sewing, who took charge last year, was dealt a weak hand by his British predecessor John Cryan. The battle to be a world-class investment bank is lost. The Wall Street Journal reports that the equities business has been a loss maker for years. It sits outside the big five in US capital markets, M&A is costly and it is way down the league table in initial public offerings. The chemistry has changed because finance minister Olaf Scholz is keen to get the 15pc of Commerzbank off government books.
But the two banks are very different. Commerzbank has a huge 1,000-branch network focused on smaller enterprises and private investors. Deutsche is focused on big corporates. It is fashionable for investment banks to venture into retail, as Goldman Sachs has in Britain with Marcus. But that is an online bank using the latest technology.
Putting two weak banks together will not necessarily create a stronger one.
Indeed, when the UK encouraged a healthy bank in lloyds to buy HBOS, it caused years of grief for stakeholders. US private equity investor Cerberus, which has stakes in both, opposes such a deal. Very wise.
Crafty revenge
COUlD Unilever finally turn the tables on Kraft Heinz after the failed bid of two years ago? Unilever shares have climbed steadily and Kraft has gone in the opposite direction, and is worth just a quarter of its former target. Revenge is best served cold but it is hard to think that ‘right on’ Unilever would have much interest in Kraft’s very unfashionable brands, which include over-processed Kraft cheeses and meat products from Oscar Mayer. no trendy Ben & Jerry’s or vegan Magnum to be found there.