The Office for Budget Responsibility’s (OBR’s) forecast which accompanied the Chancellor’s Autumn Statement – which predicted a £122bn deterioration in the public finances by 2020-21 with just under half (£59bn) directly attributable to Brexit – has continued to come under scrutiny from its critics. However most analysts believe that the forecast looks reasonable. As a result, the OBR has estimated that UK public sector debt will top £1.9 trillion by the end of the decade, up from £500bn 10 years ago and £1.0 trillion in 2010, to reach 90% of gross domestic product (GDP).
The OBR also predicts a temporary and modest slowdown in growth to 1.4% next year, picking up to 1.7% in 2018 and 2.1% in 2019 (the latter in line with its pre-referendum forecast). Those analysts that support the OBR growth predictions point out that they are above the consensus levels and are stronger figures than those from the Bank of England (BoE). In light of the referendum result, the OBR has abandoned its intended upward growth revision and instead revised growth potential lower on the assumption that net migration drops gradually to 185,000 a year from 330,000 last year.
The second estimate of GDP confirmed that the economy grew by 0.5% in the three months to September with the largest contribution coming from net trade. The ONS reported that a surprise rise in business investment since the vote to leave the EU, combined with robust consumer spending and strong exports drove economic growth in the third quarter. Business investment grew by 0.9% quarter-on-quarter despite expectations from economists that it would fall by 1.0% in the three months after the Brexit vote over fears that companies would defer or cancel investment plans due to economic uncertainty. This rise helped to push overall investment up by 1.1% in the quarter. However analysts noted that spending by businesses was still 1.6% lower when compared with last year.
Analysts believe that Mark Carney, the Governor of the Bank of England, is working on a plan (the “Brexit buffer”) to keep UK businesses in the single market for at least two years after the country leaves the EU. The intention is to give business time to adapt to the new arrangements. This could mean companies continue to operate under the current trading rules until 2021. Supporters comment that the proposal would allow the UK government to offer a degree of comfort about the future without revealing its broader strategy. It would also cushion the financial sector and broader economy from post-Brexit turbulence.
The latest Confederation of British Industry (CBI) survey of retailers and wholesalers indicates that retail sales volumes grew at their fastest rate in more than a year in the period since the Brexit vote. In spite of rising inflation and increased economic uncertainty, the survey found a balance of 26% reported growing sales in November. This is the highest level reported since September last year and far above economists’ expectations of a balance of 12%. The November reading was up from a balance of 21% in October. Retailers were also optimistic about the Christmas season with a balance of 23% expecting sales volumes to be higher next month, the largest balance since December last year.
The European Commission (EC) has released a series of amendments to Capital Requirements Directive (CRD IV) which some observers are calling CRD V. The overhaul has been many months in the making and is not expected to be complete until the end of January 2017. However most analysts believe that the announcement has clarified a number of points that should be well received by the financial markets.
The UK Government has reduced its stake in Lloyds Banking Group plc following a share sale worth over £340m.This means that taxpayers now own an 7.99% stake in the bank which is down from the 43% share it held following the lender’s bailout six years ago when it received £20.5bn from the taxpayer. So far the UK Government has recouped just under £17bn of taxpayer cash after it began selling off its stake in 2013. Earlier this month UK Financial Investments Limited (UKFI) which manages the Government’s stake in Lloyds Banking Group had said it would resume share sales in a bid to return Lloyds to full private ownership over the next year. The Bank has also announced flat underlying profits for the third quarter and has set aside a further £1.0bn to meet compensation claims for the mis-selling of payment protection insurance (PPI) in an attempt to draw a line under the scandal.
Monte dei Paschi di Siena, Italy’s third-biggest lender, is in the process of raising more than seven times its stock market value to sell off bad loans and boost capital after official stress tests in July singled it out as Europe’s weakest bank. Shareholders in the world’s oldest bank have approved a plan to raise €5.0bn, the third cash-call in as many years, to keep it afloat. If the plan were to fall through the bank would need state support.
The protection limit for UK retail and SME depositors under the Financial Services Compensation Scheme (FSCS) could be in line for a £10,000 increase from 30 January 2017. The Prudential Regulation Authority (PRA) is consulting on resetting the FSCS limit next year to £85,000 which is the equivalent to the limit of €100,000 that applies across the European Union. The consultation follows a review by the FCA of the current protection limit in light of the weaker Sterling exchange rate against the Euro.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||28th November 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices|
|ABN Amro Bank N.V.|
|ABN AMRO Groep N.V.||n/a||n/a||n/a||20.06||20.30||-1.2%|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||2.07||2.06||+0.5%|
|Allied Irish Banks||70||69||+1.4%||5.35||5.06||+5.7%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||14.19||14.27||-0.6%|
|Aust and NZ Banking Group Ltd||73||73||0.0%||28.28||27.98||+1.1%|
|Banco Bilbao Vizcaya Argentaria S.A.||143||139||+2.9%||5.77||5.86||-1.5%|
|Parent: Barclays plc|
|Barclays Bank plc||92||91||+1.1%||2.16||2.12||+1.7%|
|BNP Paribas S.A.||87||83||+4.8%||54.94||54.39||+1.0%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||13.61||13.97||-2.6%|
|Credit Agricole S.A.||78||74||+5.4%||10.84||10.81||+0.3%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||145||146||-0.7%||20.88||20.93||-0.2%|
|Deutsche Bank AG||218||221||-1.4%||14.85||14.96||-0.7%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||77||76||+1.3%||6.41||6.34||+1.1%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||67||65||+3.1%||12.75||12.78||-0.2%|
|Intesa Sanpaolo S.p.A.||164||162||+1.2%||2.02||2.04||-1.0%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||5.21||5.07||+2.8%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||77||77||0.0%||0.59||0.59||0.0%|
|Metro Bank plc||n/a||n/a||n/a||33.58||31.92||+5.2%|
|Nationwide Building Society||85||85||0.0%||n/a||n/a||n/a|
|Nordea Bank AB||70||70||0.0%||97||97||0.0%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||127||127||0.0%||2.02||2.05||-1.7%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||82||82||0.0%||4.28||4.27||+0.2%|
|Shawbrook Group plc||n/a||n/a||n/a||2.52||2.50||+0.8%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||124||124||0.0%||6.35||6.25||+1.5%|
|Svenska Handelsbanken AB||61||61||0.0%||128||127||+0.8%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3997||3968||+0.7%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||109||106||+2.8%||n/a||n/a||n/a|