A chorus of downbeat reports on the health of the British economy published on Monday presents a sharp contrast to the chancellor Phillip Hammond’s spring statement message that there is “light at the end of the tunnel”.
Credit card company Visa said spending on cards fell again in February, dropping 1.1%, and that the first quarter of 2018 was on track to be the “worst on record”. It said spending by consumers had fallen in nine out the past 10 months.
The number of shoppers visiting Britain’s high streets also continued to decline last month. High street analysts Springboard said footfall was down 0.5% in February but the picture was worse in shopping centres where the number of visitors was down 0.9%.
Surveys of business sentiment also paint a relatively gloomy picture for the economy – apart from optimism among manufacturers benefitting from improved exports and a stronger global economy.
IHS Markit, which conducted the half-yearly survey, said service providers remain much less optimistic than the post-crisis peak seen in early-2014. Services firms and the badly hit construction sector are likely to suffer modest or negative growth this year.
Against the trend, manufacturing firms expect to expand this year and employ more staff. Last week, the digger maker JCB said it plans to create 600 new jobs at its plants in Staffordshire and Derbyshire.
Tim Moore, economist at IHS Market, said: “UK business confidence has edged up since last autumn, but levels of optimism remain among the lowest recorded over the past five years. Consumer-facing areas of the UK service sector were a key area of weakness, with growth expectations curtailed by worries about the outlook for household spending.”
A breakdown of the Visa figures shows the extent to which Britons are tightening their belts. The amount spent on the physical high street fell 2.6% while households also cut back spending on recreation and culture by 6.1%.
“Britons have been in belt-tightening mode since last summer,” said Mark Antipof, chief commercial officer at Visa. “February’s cold snap certainly didn’t alleviate this situation, particularly when we shine a spotlight on high street spending, and recreation and culture in particular, which saw its biggest decline since April 2010.
“As we look ahead into March, consumer spending is at risk of posting one of the worst Q1 results on record,” he added.
A separate study by the EY Item Club found that financial services firms will suffer from weak consumer confidence and rising costs during 2018. It forecast that banks will see a slowdown in one of the most profitable areas of business – consumer credit – which will slow for the first time in five years, dropping to 3% and then 2.8% in 2019, as consumers hit the brakes on the amount of debt they hold. This is a fall from the previous highs of 6.9% growth in 2017 and 8% growth in 2016.
“Inflation is forecast to drop to 2.5% this year from 2.7% in 2017, which will ease the squeeze on household budgets, but real disposable incomes are forecast to only rise by 1.2% in 2018, constraining consumer’s spending power,” said Omar Ali, EY’s UK head of financial services.
For parents who have been enjoying the freedom of living child-free, now comes research to spoil it all
The bedrooms have been redecorated in grown-up colours, the 25-year-old soft toys chucked out, the washing machine is blissfully underused and, thanks to the apparent current raging addictions of baby boomers, a holiday or two – cruising in the Med, the Antarctic, anywhere that avoids dry land – have been booked. And then they’re back.
According to a recent study by the London School of Economics (LSE), adult children who return to the family home after a period away – often at university – cause a significant decline in their parents’ quality of life and wellbeing.
The European Union has warned that it will regulate cryptocurrencies if the risks exposed by the meteoric rise of bitcoin and its ilk are not addressed.
The boom and bust of cryptocurrencies has seen some investors make millions where others have suffered heavy losses. Bitcoin, which now trades at about $9,000 (£8,000) a token but recently dropped to less than $6,000, leads the pack, rising nearly 2,000% to just under $20,000 in 2017, fuelling a global investment craze.
“This is a global phenomenon and it’s important there is an international follow-up at the global level,” Valdis Dombrovskis, the EU’s financial chief, said on Monday. “We do not exclude the possibility to move ahead (by regulating cryptocurrencies) at the EU level if we see, for example, risks emerging but no clear international response emerging.”
Dombrovskis was speaking after hosting a roundtable meeting attended by the European Central Bank, industry bodies and the Financial Stability Board, which writes and coordinates regulation for the Group of 20 Economies.
G20 finance ministers and central bankers meet in Buenos Aires in March, with cryptocurrencies set to be on the agenda. The EU would decide how to address the issue later this year or early in 2019, the financial services commissioner said.
Regulation of cryptocurrencies could seek to bring them in line with financial legislation designed to combat money laundering and counter-terrorism, forcing traders to disclose their identities and look to make it more difficult to use bitcoin, Ethereum or others for illegal activities.
Germany and France said this month that new opportunities arise from cryptocurrencies, but they could pose substantial risks for investors and be vulnerable to financial crime without safeguards. So far, however, there appears to be no strong consensus among G20 countries to regulate them closely.
Policymakers worry about losing jobs and growth to other regions if they crack down hard on innovation in the sector, especially stemming from the blockchain technology that underpins cryptocurrencies, which Dombrovskis said held strong promise.
Markus Ferber, a centre-right member of the European parliament, said a quick EU regulatory response was needed, rather than waiting years for international rules to trickle through.
“In order to make sure that retail investors do not fall prey to market manipulation and fraud, virtual currencies should be regulated as other financial instruments,” Ferber said in a statement.
In the wake of the resolution to the US government shutdown, the Dow Jones Industrial Average was initially expected to open higher.
But when trading began the Dow dipped 27 points or 0.1%, with investors moving on to worry about the impact of Donald Trump’s move to impose steep import tariffs, including possible retaliation. South Korea and China both protested at the duties on washing machines and solar panels.
The S&P 500 however edged up 0.03% and the Nasdaq composite climbed 0.23%.
David Autor, Ford Professor of Economics at MIT, has predicted that today’s giant tech companies – such as Facebook – will suffer the face of previous dominant companies.
He’s on a panel asking ‘can we live with monopolies’.
Autor explains that we currently live in an environment of ‘winner takes most’ markets, where having a small edge over your competitor gives you a massive advantage.
So firms like Amazon and Facebook are growing organically (people are on Facebook because their friends are on Facebook), but that doesn’t mean that this growth is healthy. Or sustainable, in the long run.
We did have these monopolies in the past, Autor points out, citing the US railroads
My guess is that Facebook will be pretty much non-existent in 20 years time, Autor declares.
Autor is also critical of the US model where employees are not treated as stakeholders (unlike shareholders).
This situation has created a level of inequality that has led to political upheaval, he says.
Elsewhere in Davos, the head of the Red Cross has warned that fresh humanitarian crises could break out this year.
Peter Maurer, president of the International Committee of the Red Cross, says there are a lot of fragile situations that could develop into “full-fledged” conflicts (as we saw with the Rohingya crisis in 2017).
Maurer says there are plenty of places on the brink of war, violence and disruption.
He cites Southern Philippines (which is under martial law), Myanmar, Afghanistan, the Middle East, and large parts of Africa as places where the Red Cross sees fragility – but “we don’t know which one will blow up in our face”.
So what can Davos do about it?
Top business leaders have the skills and resources to help businesses in those fragile areas, and help them tipping into conflict.
Maurer also warns that humanitarian organisations need more money:
In 2018 we face a big gap between the needs of people and the capacity of the international system as a whole to respond.
The gap can only be bridged by more and better finance.
Ultimately, Blanchett says, we must remember we are all citizens, and stand up for what we believe in.
Cate Blanchett is close to tears, as she talks about one refugee family she met in Jordan. They had fled conflict with five of their children, being shot at by all sides.
Eventually, the father had to choose between carrying his suitcases and carrying his children (he chose the children). No-one should be put in that position, she says.
Q: Aren’t politicians taking a hard line on refugees because they are reacting to the concerns of their populations?
Cate Blanchett argues that they’re actually reacting to populist media and the news cycle.
We are at a fork in the road, she says.
We try to teach our children to be compassionate, to be tolerant, to accept diversity, to share. But all the structures that are around them are not doing the same, so it’s quite a schizophrenic world they’re living in.
And taking a swing at populist politicians, she says she don’t understand how turning people in a boat back became an election winner.
Australian actor Cate Blanchett is talking about the refugee crisis now (yesterday she was handed a WEF award for her work on this issue).
She explains how she went backpacking through Europe in her youth, which opened her eyes to economic inequality.
I was staying in youth hostels that were more like Turkish prisons, She explains, seeing people who didn’t have anywhere else to go
Q: There’s been a lot of criticism of Australia’s policy to refugees….
Blanchett says she was ‘bewildered’ to see the generous, openhearted, multi-cultural Australia she grew up in “flouting the UN humans rights convention”
I was very distressed that Australia was reverting back to practices that made us a fortress again.
This drove Blanchett to become a goodwill ambassador to UNHCR
I think it’s shameful. There’s so much misinformation about refugees.
They are forced to flee, and then they are vilified in the media.
Blanchett says the misinformation about refugees is “very distressing”, and doesn’t connect with the actual people she has met.
There are 65 million displaced people in the world, 22 million are refugees, half are women and children. But just 1% have been resettled in advanced developed economies.
It’s the developing world that is shouldering the deep burden of refugees.
She cites the Lebanon, where a quarter of the population are now refugees.
Blanchett also criticises the way refugees are reported in the media:
People are told this narrative that these people, who have so much to offer, are going to be a burden on us or become a terrorist threat.
Q: But have some people in developing economies been encouraged to travel to countries such as Germany, because they hoped to be given asylum?
Should we not talk about it, Blanchett replies rhetorically. The problem is not going to go away.
These are not terrorists. These are innocent people, who want to return home.
She’s also calling for more burden-sharing between countries, to help address the refugee crisis.
The problem with all this optimism at Davos is that business leaders, economists and politicians have a nasty habit of missing impending disaster.
WEF veterans point out that the mood is often particularly upbeat shortly before a crisis.
Barclays CEO Jes Staley summed it up this morning, on the financial crisis session when he said Davos feels “a little bit like 2006 when we were all talking whether we’ve solved the riddle of economic crises.”
The Carlyle Group David Rubenstein agreed, saying:
Generally, when people are happy and confident, something wrong happens.
We have made great progress in reducing the deficit by three quarters since 2010, but government debt is still far too high. Our balanced approach to government spending is getting debt falling, while investing in key public services and keeping taxes low.
And the Office for Budget Responsibility said:
It appears that the underlying improvement in borrowing so far this year is a little faster than would be consistent with our November forecast.
Christoph Franz, the chairman of Roche, agrees that spirits are high at Davos this year – and with good reason.
Speaking to CNBC, Frans argues that ‘healthy’ economic growth is boosting optimism among top execs.
Basically, I have been here for more than ten years, I share your perspective, there’s a very positive mood right now among business leaders here in Davos, and I think the reason is, we see a growth perspective in, not only some specific countries, but on a global scale, and the growth is achieving numbers which we have seen only before 2007.
So, the economy is taking up, and for the time being, it is growth which has been created by a lot of investment.
Britain’s manufacturers continue to be optimistic about business prospects and exports, but are increasingly worried about skills shortages.
The CBI’s latest industrial trends survey for the three months to January showed 27% of firms were more optimistic about the general business situation that three months ago, while 14% were less optimistic. The balance of +13% is up from -11% in the previous quarter.
Growth in manufacturing output and domestic and export orders all picked up, compared with the previous three-month period, although the monthly order book figure showed a fall from +17 in December to +14 in January.
And the number of firms saying a lack of skilled labour was likely to limit output over the next three months was the highest for more than four decades. Rain Newton-Smith, CBI chief economist, said:
It’s good to see manufacturing going from strength-to-strength with growth up and the buoyant global economy boosting export orders. But the past depreciation in Sterling continues to leave its mark on firms’ costs and margins. With expectations for factory gate price inflation at their highest in 30 years, the pressure on consumer prices looks set to persist.
Capacity pressures are ramping up and skill shortages are a big concern, underlining the importance of establishing a future immigration system that provides companies with access to talent and labour. The building blocks of a new system that meets economic needs and public concerns must start with scrapping the net migration target, which has never been fit-for-purpose.
Modi wraps up his speech by identifying three priorities:
The world economy must be more inclusive
Policymakers must remain committed to a rules-based world order
Reforming the major institutions of the world, connected to politics, the economy and securtry
He talks about the Indian soldiers who died in world wars in the 20th century, to help create “peace and humanity”.
India can be a humanising and harmonising force in an uncertain world, Modi promises, citing Indian prayers and poetry which advocates a free and peaceful world.
Together we can create a ‘heaven of future’, he promises, in a somewhat gushing conclusion.
Alas, he’s not taking any questions.
On climate change, Modi says India is making big progress towards hitting its goals for renewable energy.
Modi says India will achieve strong growth over the next few years.
Kenneth Roth of Human Rights Watch suggests Modi isn’t living up to the glowing ideals he’s preaching today:
(remember, Modi was once banned from visiting the US following claims he had supported Hindu extremists during Hindu-Muslim riots. He was later cleared by the Indian Supreme Court).
Modi is now encouraging businesses to invest in India, citing the hundreds of laws and regulations which have been stripped out to make te economy more competitive.
Instead of red tape, we offer you a red carpet, he jokes.
Global stock markets have roared ahead in 2017, with the MSCI index of bourses in 47 countries up by 22% and almost $9tn (£6.6tn) according to Reuters. This has been fuelled by a boom in growth among developed nations and Donald Trump’s plan to cut US corporate tax rates – which is expected to boost company profits in the world’s largest economy and returns to shareholders. China managed to maintain its rate of expansion, dispelling fears over a potential sharp slowdown as it matures after decades of rapid growth, while the eurozone also staged a recovery after years of uncertainty. In Britain, the FTSE 100, packed with companies that earn much of their profit in foreign currencies, has surged as a result of stronger global growth and the weak pound since the Brexit vote.
Buoyant global trade
The Baltic Dry index is used as a proxy for global growth because it measures dry freight costs for commodities such as coal, rice and wheat. When there is a jump in demand for shipping these products, it signals expansion for the world economy. This year it has risen to its highest levels in four years amid a recovery in global trade. Other barometers for growth, such as surveys of business activity from firms’ purchasing managers, have shown appetite for goods and services in rude health across developed economies in recent months. Still, fears linger over a breakdown in trade from rising protectionism in the US and Europe.
Investors stay relaxed
Known as Wall Street’s fear gauge, the Chicago Board Options Exchange Volatility Index is a measure of the stock market’s expectations for how much prices might swing by, up or down, over a 30-day period. The higher the index, the more likely it is investors will be in for a wild ride. This year, the barometer fell to its record low of below 9 points. Anything above 20 indicates that things are going awry, and is a common feature of falling markets.
Pound stages Brexit comeback
The pound has staged a recovery on global exchanges since the start of the year amid gradual progress in the Brexit negotiations. Although sterling is still about 10% below its level before the EU referendum, the currency has risen by almost 10% this year to stand at about $1.3505. Meanwhile, the dollar has struggled to benefit in 2017 from the Federal Reserve’s interest rate hikes in March, June and December, while the euro has gained ground amid a strengthening eurozone economy and as expectations grow for the European Central Bank to finally start tightening monetary policy by curbing its quantitative easing programme.
Eurozone on the mend
One of the biggest surprises this year was stability in the eurozone after years of tumult. After the election of Donald Trump, many market watchers expected the next countries to succumb to populist politics would be in the EU – which could have spelled doom for the single currency. Marine Le Pen failed to take power in France, as did anti-Islam, anti-EU populist Geert Wilders in the Netherlands and Alternative für Deutschland in Germany. Meanwhile, amid a more stable political backdrop, growth has roared ahead. Still, accommodative monetary policy that is expected to be gradually withdrawn has helped, with ECB governor Mario Draghi saying the recovery will still heavily rely on stimulus from the central bank for now.
Wage growth remains subdued
There has been tepid growth in the price of goods around the world, barring the UK, where the pound’s sudden devaluation following the Brexit vote led to surge in imported food and fuel costs. Wage growth in particular was missing in action in 2017, despite low rates of unemployment across most major developed economies. This has left many in the economics profession puzzled, because tight labour markets typically lead to greater levels of bargaining power among workers to demand higher wages. It also poses an additional challenge to central bankers – who would like to see stronger wage inflation before they raise interest rates, normalising the world economy after years of stimulus in the wake of the global financial crisis that started 10 years ago.
Productivity puzzle persists
The failure to drive up the productivity of workers has puzzled economists the world over this year, not least in the UK. Although the problem is particularly sharp in Britain, each of the G7 nations has experienced sluggish growth since the crash a decade ago. That’s a worrying sign for wage growth, because greater output per hour worked, or per worker, can help to support higher pay for that output. The culprit could be higher levels of employment, low interest rates, or low levels of investment in productivity boosting projects by governments and businesses. In the UK, weak productivity growth was behind a sharp downgrade to GDP growth alongside Philip Hammond’s budget in November. It’s also one of the key reasons why UK workers aren’t expected to see their wages after inflation go back above pre-crisis levels until the mid 2020s.
Oil bubbles up
The global oil price has recovered sharply in 2017, benefiting from increasing demand from factories around the world, particularly in China, amid a boom in economic activity. After crashing in late 2015 to spook global markets, this year has been one of calm and steady gains. Opec has reined in production to keep a lid on supply, while there have been no major escalations in tensions to drive up the price to unsustainable levels. One warning: US shale oil production may start to come back online at current prices, as the more expensive costs involved with extraction become economical once more. This could boost supply, leading prices to fall.
Bitcoin mania takes hold
Probably the financial story of the year. Even though there are fears of a coming crash, 2017 will go down as the year of the cryptocurrency. Bitcoin’s rise has been meteoric, beginning the year valued at about $1,000 and reaching almost $20,000 by the middle of December. There have been wild swings on the way, with the currency losing more than a quarter of its value in a single day this month, before staging a recovery. Economists think bitcoin has all the telltale signs of a bubble, with worrying parallels to the Tulip mania of the 17th century, when the price of bulbs crashed in spectacular fashion after a buying frenzy.
Chinese debt worries
China’s rapidly accumulating debt pile, having quadrupled since the financial crisis, became of increasing concern this year – although has not yet roiled the global markets. The International Monetary Fund warned that Chinese debt is now high versus international norms and that rapid growth may have led to an unwillingness among officials to let struggling firms fail. In September, Standard & Poor’s downgraded its credit rating citing the risks from total debts in, which have quadrupled since the financial crisis. While China has started taking steps to rein in debt without having affected growth so far, economists worry a wrong move by officials could upset the apple cart in the near future.
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