Expectations are beginning to grow that the Chancellor’s autumn reset of UK economic policy will include a sizeable fiscal stimulus in the form of additional infrastructure spending, or tax cuts, or both despite many economists predicting the likelihood of bigger budget deficits and higher government debt even if he chose to do nothing.
The latest UK Treasury compilation of independent economist monthly forecasts predicts average growth of 0.7% for 2017 which is down from 0.8% last month and down from 2.1% in June. Analysts have consistently warned that next year is expected to be the year of greatest economic weakness with business investment and employment likely to be subdued and consumers likely to suffer from an income squeeze as a result of a rise in inflation resulting from the fall in the foreign exchange value of sterling.
Slower gross domestic product (GDP) growth is expected to feed through to higher borrowing and so more debt. In June, economist forecasts predicted government borrowing for this fiscal year of £61.7bn, falling to £46.7bn for fiscal year 2017-18. However the latest revised forecasts predict government borrowing of £66.9bn and £59.8bn respectively.
UK retailers have reported their strongest sales in August for six months adding to signs that consumers are taking the country’s vote to leave the European Union in their stride, at least for now. The monthly sales volume index figure released by the Confederation of British Industry (CBI) rose to +9 in August which was its highest level since February and compares with an initial slump vote to -14 in July after the Brexit decision. Sales in September are expected to moderate with a sales volume index forecast figure of +3 for the month. The release was in keeping with recent data showing consumers appear to have shrugged off the shock Brexit vote with retail sales boosted by warm weather and by overseas buyers attracted by a cheaper pound. However many analysts warn that while the fall in sterling has boosted visitor numbers to the UK it is likely to push up the price of imported goods over time which will mean households will be more likely to rein back spending on non-essential items.
Financial market continue to doubt whether the Federal Reserve (Fed) will hike interest rates in September after Fed Chair Janet Yellen stated that the case for an interest rate increase was strengthening but provided little clarity on when it would next move. Fed Vice-Chair, Stanley Fischer, has been more forthcoming suggested a hike was possible as soon as September. While the initial market reaction was to push up the probability of a September hike to 44%, investors quickly had second thoughts and the implied chance has since reverted to 36%. Analysts caution that the August payrolls report due this coming Friday might miss expectations and make it that much harder for policymakers to contemplate a September tightening.
Analysts believe that Bank of America Merrill Lynch (BAML) – corporate advisers to the Co-operative Bank plc – could recommend winding down the troubled lender as it embarks on a review of its future. BAML have been tasked with helping the Co-operative Bank management to get the business into shape for a potential sale, a merger, or even an eventual shutdown, as its hedge fund backers who own 80% of the shares look for an exit three years after rescuing the bank. However potential buyers may be put off by the bank’s continuing losses, IT problems and the possibility that more bad debts could emerge post-Brexit from the commercial property book that it acquired by buying the Britannia building society in 2009. Analysts also question whether the Bank of England will continue to tolerate the Bank’s current capital position which is considered insufficient to cope with any major stress situations to the UK economy.
During last week the share prices of those “challenger” banks that have a significant exposure to small and medium sized enterprises (SMEs) have risen strongly with Aldermore Bank plc up by +23.5% and Shawbrook Group plc up by +23.4%. The share prices of these banks were particularly adversely impacted by the initial reaction to the Brexit decision but it appears that investor confidence has been mostly restored on the back of some recent encouraging economic data and strong interim results from these banks.
|5-YEAR CDS SPREADS AND SHARE PRICES|
|Date:||29th August 2016|
|5-Year CDS Spreads (bps)||Equity Share Prices (LCL)|
|Parent: Aldermore Group plc|
|Aldermore Bank plc||n/a||n/a||n/a||1.63||1.32||+23.5%|
|Allied Irish Banks||59||59||0.0%||6.25||6.40||-2.3%|
|Parent: Arbuthnot Banking Group plc|
|Arbuthnot Latham & Co.||n/a||n/a||n/a||16.00||16.18||-1.1%|
|Aust and NZ Banking Group Ltd||67||68||-1.5%||26.67||26.68||-0.0%|
|Banco Bilbao Vizcaya Argentaria S.A.||119||114||+4.4%||5.43||5.09||+6.7%|
|Parent: Barclays plc|
|Barclays Bank plc||92||91||+1.1%||1.66||1.60||+3.7%|
|BNP Paribas S.A.||73||71||+2.8%||44.83||42.58||+5.3%|
|Parent: Close Brothers Group plc|
|Close Brothers Limited||n/a||n/a||n/a||13.73||13.43||+2.2%|
|Credit Agricole S.A.||71||70||+1.4%||8.20||7.92||+3.5%|
|Parent: Credit Suisse Group AG|
|Credit Suisse AG||126||126||0.0%||21.26||21.86||-2.7%|
|Deutsche Bank AG||216||202||+6.9%||12.60||11.95||+5.4%|
|Parent: HSBC Holdings plc|
|HSBC Bank plc||70||70||0.0%||5.47||5.43||+0.7%|
|Parent: ING Groep N.V.|
|ING Bank N.V.||61||61||0.0%||10.88||10.44||+4.2%|
|Intesa Sanpaolo S.p.A.||133||119||+11.8%||2.01||1.83||+9.8%|
|Parent: Investec plc|
|Investec Bank plc||n/a||n/a||n/a||4.66||4.95||-5.9%|
|Parent: Lloyds Banking Group plc|
|Lloyds Bank plc||83||81||+2.5%||0.58||0.55||+5.5%|
|Metro Bank plc||n/a||n/a||n/a||24.01||23.90||+0.5%|
|Nationwide Building Society||85||85||0.0%||n/a||n/a||n/a|
|Nordea Bank AB||65||65||0.0%||79||77||+2.6%|
|Parent: RBS Group plc|
|Royal Bank of Scotland plc||110||109||+0.9%||1.97||1.88||+4.8%|
|Ult. Parent: Banco Santander S.A.|
|Santander UK plc||82||82||0.0%||3.89||3.64||+6.9%|
|Shawbrook Group plc||n/a||n/a||n/a||2.32||1.88||+23.4%|
|Parent: Standard Chartered plc|
|Standard Chartered Bank||108||110||-1.8%||6.23||6.25||-0.3%|
|Svenska Handelsbanken AB||61||61||0.0%||108||105||+2.9%|
|FTSE 350 BANK INDEX||n/a||n/a||n/a||3499||3429||+2.0%|
|SNR FIN ITRAX CDS 5-YEARS (ESTIMATED)||91||89||+2.2%||n/a||n/a||n/a|