Analysts caution that the new minority Conservative government faces tough challenges as it begins the complex task of negotiating Brexit over the next two years. Some analysts are predicting that the combination of a lack of economic momentum and heightened uncertainty may prompt the government to relax its grip on spending. One strategy might be to make sure people feel better about the domestic economy in case things don’t go well with the Brexit negotiations.
The Organisation for Economic Co-operation and Development (OECD) has predicted in its latest report that UK growth will slow both this year and next as Brexit uncertainty hits businesses and households. It has forecast that the UK would grow by 1.6% this year compared with 1.8% for 2016 and then slow to 1.0% in 2018. This still leaves the UK as the fourth-fastest growing economy among G7 advanced nations this year after Canada, the U.S. and Germany, albeit the second-slowest in 2018 equal with Japan and only just ahead of Italy. The OECD has also changed its view on austerity by urging the government to use the low interest rate environment to borrow for investment purposes. Until now it has been a strong supporter of the UK austerity measures.
However analysts point out that the OECD’s pessimism stems from its assumption that the UK will revert to World Trade Organisation (WTO) rules on a “most favoured nation status” from April 2019. The projections of other forecasters such as the Bank of England and the Office for Budget Responsibility imply some form of free trade deal and closer ties with the single market.
The OECD’s downbeat picture for the UK economy was not reflected for other countries as it raised its global growth forecast from 3.3% to 3.5% for 2017. This was the fastest pace of growth in six years, as the eurozone, Japan and China were all upgraded. The U.S. was broadly unchanged for 2017 at 2.1% but downgraded sharply for 2018 from 2.8% to 2.4% which the OECD blamed on delays to the Trump administration’s plans for tax cuts and infrastructure spending.
The latest Markit/CIPS purchasing managers’ index (PMI) for the dominant UK services sector, which is considered to be one of the best indicators of gross domestic product (GDP) growth, slipped to 53.8 in May after rising to a four-month high of 55.8 in April. Analysts caution that UK consumers are finally feeling the squeeze of inflation as businesses and shoppers delay spending decisions before the start of Brexit talks. This is expected to temper the chance of a strong rebound in growth from a weak first quarter. The new data highlights the impact of rising inflation as a recovery in oil prices and the fall in the value of the pound has pushed up costs in the supermarket and at the petrol pump. However the PMI reports were not all gloomy news with the manufacturing and construction sectors for May beating expectations after delivering solid performances.
The strong PMI figures for April were in stark contrast with the disappointing official figures for the same month recently released by the Office for National Statistics (ONS) for the construction and manufacturing sectors. Some analysts believe that these figures have thrown into doubt any hope that the UK economy will bounce back from a difficult start to the year. Manufacturing barely registered growth in April, rising by only 0.2%, while construction fell by 1.6% owing to a 7.0% decline in private housebuilding.
Meanwhile survey figures from the British Retail Consortium (BRC) and KPMG showed that UK retail sales had fallen by 0.4% in May on a like-for-like basis compared with last year. Total sales rose by 0.2% which was significantly down again on the 1.4% growth recorded for last May. The BRC said that the sales growth recorded last month was the lowest total since January and below the three-month and yearly averages of 1.9% and 1.2% respectively. Much of the fall was driven by weak sales of non-food products which were down 0.3% on a like-for-like basis during the period and the worst performance since May 2011.
The independent directors of Shawbrook Group plc have rebuffed a fourth and final takeover offer by a consortium of private equity firms that put the lender’s worth at £868.0m. In a statement to the stock market the directors have stated that they remain confident that Shawbrook can continue to grow prudently over the medium term as an independent listed company. The statement also stated that the independent directors believe the final offer undervalues Shawbrook and its prospects and therefore they advise that shareholders take no action with regards to the final offer. The rejection came after Marlin Bidco, a consortium comprising BC Partners and Pollen Street Capital, tabled a 340p-a-share cash offer for Shawbrook. The funds already own a 38.8% stake in Shawbrook and so far shareholders accounting for 6.6% of the remainder of the group have accepted the takeover offer. However Marlin has structured the approach so that only 50% need to approve it in order for the takeover to go through. This means that as it stands they are close to taking control. Marlin has previously stated that if it ends up with less than 75% of the shares it is prepared for Shawbrook to remain a listed business.
Pressure is building on Spanish bank debt following the bailout and forced takeover of Banco Popular by Banco Santander last week at a token price of €1.0. Banco Popular was saddled with €37.0bn in toxic property loans and was rescued by Santander after withdrawals by savers were running at a rate of around €2.0bn per day as the bank’s stock market value halved. However the crucial difference from previous forced takeovers was that “safer” junior bondholders, as well as riskier senior bondholders, were wiped out during the rescue. This has shocked investors who are looking for the next weak link. As a consequence two of Spain’s perceived weakest lenders (Liberbank and Unicaja) are now the focus of investor panic which has raised fears of a wider Spanish banking crisis.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Movements over the Last Week|
|Date:||12th June 2017|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||22.80||22.85||-0.2%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||232||232||0.0%|
|Allied Irish Banks||45||45||0.0%||6.52||6.81||-4.2%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.62||14.80||-1.2%|
|Aust and NZ Banking Group Ltd||70||71||-1.0%||27.85||28.28||-1.5%|
|Banco Bilbao Vizcaya Argentaria S.A.||84||94||-10.5%||7.44||7.24||+2.8%|
|Parent: Barclays plc|
|Barclays Bank plc||64||64||0.0%||205||211||-2.6%|
|BNP Paribas S.A.||49||53||-6.6%||63.72||63.40||+0.5%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||15.68||16.09||-2.5%|
|Credit Agricole S.A.||49||52||-7.1%||14.13||13.79||+2.5%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||73||76||-3.6%||13.21||13.36||-1.1%|
|Deutsche Bank AG||98||99||-0.7%||15.63||15.59||+0.2%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||49||52||-6.6%||685||678||+1.0%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||41||42||-4.1%||15.27||14.93||+2.3%|
|Intesa Sanpaolo S.p.A.||130||133||-2.2%||2.57||2.59||-0.8%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||572||598||-4.4%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||55||56||-1.8%||71||69||+2.0%|
|Metro Bank plc||n/a||n/a||n/a||38.34||37.25||+2.9%|
|Nordea Bank AB||36||38||-6.6%||111||111||0.0%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||75||76||-1.3%||257||258||-0.5%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||69||69||-0.0%||6.05||5.82||+4.0%|
|Shawbrook Group plc|
|Shawbrook Bank Limited||n/a||n/a||n/a||339||340||-0.4%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||73||74||-1.3%||759||745||+1.9%|
|Svenska Handelsbanken AB||33||36||-7.0%||124||121||+2.1%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||4355||4325||+0.7%|
|SNR FIN ITRAX CDS 5-YEARS||67||70||-5.5%||n/a||n/a||n/a|