Little hope for a summer bounce as no-deal fears drag down GDP growth
One swallow doesn’t make a summer, so the old saying goes. For the warm middle months of the year, the British economy looked remarkably frosty, chilled by fears over a no-deal Brexit, until the Office for National Statistics reported a surprisingly strong month for growth in May.
The figures, released last week, were a glimmer of hope that Britain might yet shrug off the worst of the Brexit cold, which has laid the economy low over recent months as companies put their investment plans on ice.
With the political chaos at Westminster – and as a carnival of promises are made by Boris Johnson and Jeremy Hunt in the Tory leadership race, many of which would surely never fly – businesses cannot be blamed for taking pause.
But underneath the warm glow of the most recent GDP figures, which showed the economy expanded at a reasonable 0.3% in May from the previous month, there are reasons to be fearful of a damp summer for growth. Paralysed by uncertainty, Britain could still tilt into recession even before the proper damage has been done from leaving the EU at the end of October.
The improvement on the month was driven by carmakers reviving production after stoppages in April, which had been planned to avoid any disruption in a no-deal scenario around the original Brexit deadline on 29 March.
However, the ONS warned that car production had returned only to the subdued levels seen at the start of the year. The economy was hardly racing ahead, it suggested, as Brexit uncertainty held down growth.
The monthly growth figures could prove a false indicator, masking a wider slowdown in the three months to June. The National Institute of Economic and Social Research, one of the leading economic forecasters, still expects GDP to slide by 0.1% in the second quarter, putting the UK on the brink of recession. It bets on a return to growth in the third quarter, avoiding such a fate, but the risk is there.
The latest readings for activity from the IHS Markit and the Chartered Institute of Procurement and Supply, which are closely watched by the Treasury for early warning signs, indicate a near standstill in June. And according to retailers, annual consumer spending growth in June was the weakest since 1995.
The world economy has also faltered in recent months, as the US-China trade war rattles international trade. The openness of the UK economy means it is especially vulnerable, at a time of maximum weakness due to Brexit. The odds of a recession are rising. And the consequences would be far-reaching.
One scenario would see the economy crash further into the red, exacerbating the damage done in recent months. Tailbacks at ports could cause disruption across the country for manufacturers, serving as a brake on growth.
Employment has so far held up reasonably well, with record numbers of people in work. But this could change rapidly in a no-deal Brexit.
Another scenario would have political consequences. Should the UK slide into recession in the middle of the year, the incoming prime minister could blame prevarication for the damage. Delaying Brexit has caused the damage, they might say; Brexit, “do or die”, in the autumn is the only answer. Down such a road madness lies: ending the uncertainty with the thing businesses fear most would be the worst possible solution.
It is highly unlikely no deal would have little impact on growth. Mark Carney, the Bank of England governor, warned on Thursday it would deliver a “major economic shock”. But what if the impact wasn’t as bad as feared? Johnson or Hunt could turn on the Treasury spending taps, boosting growth, and claim to have rescued the economy from a recession, while also leaving the EU. A “Brexit bounce” could make a snap election tempting soon thereafter.
The British economy this summer stands in sharp contrast to 2018, when the men’s football World Cup and hot weather brought consumers out in their droves to fuel a mini economic boom. Despite positive growth in May, this year is very different. A summer slump awaits.
Watchdog wakes up to plight of publicans tied to big brewers
Old habits are hard to break and the so-called beer tie is no exception. It dates back to the 18th century, when brewers, particularly in London, started churning out porter in huge volumes. To ensure steady custom, they helped publicans set up shop by renting them premises. In exchange, the tenant agreed to stock their beer. Everybody was happy.
That arrangement has endured, in one form or another, for the best part of 300 years. But in 2016, amid growing disillusionment about the power wielded by a handful of major pub companies (pubcos), the government introduced the pubs code.
It contained the market rent only (MRO) option, a mechanism that theoretically allowed publicans to cut the tie. They would lose out on favourable lease terms but would be freed to buy beer more cheaply on the open market and choose what brews they served.
The problem is that the MRO option is little more than a myth. Pubcos use deep pockets and sharp lawyers to run rings around their tenants and keep the tie intact. Many publicans simply lose heart and give up. Precious few MRO applications have been successful.
The Pubs Code Adjudicator, which regulates disputes, has been accused of being supine in the face of an obvious power imbalance. Some say it is far too cosy with pubcos to challenge them.
Now the regulator has launched what could be a landmark investigation into Heineken-owned Star Pubs & Bars. It suspects Star of seeking to impose unreasonable terms on publicans who apply to go free of tie. The deputy adjudicator, Fiona Dickie, hinted that other pubcos could face similar scrutiny.
Publicans will feel it should not have taken this long for the watchdog to bare its teeth. But late is better than never.
Half-baked reforms beget half-baked market response for Deutsche
At the end of Deutsche Bank’s most tumultuous week in decades, shares in this still-enormous financial firm closed on Friday lower than where they stood on Monday morning. In other words, chief executive Christian Sewing’s “radical” plan to “transform” the business was greeted with a sceptical shrug. Deutsche is still the lowest-rated major European bank. Unfortunately for Sewing, the market’s reaction was logical. Deutsche’s troubles were at least 10 years in the making and were ignored for another 10. Fixing the deep ailments could take another decade.
The crisis was born in the birth-of-the-euro era when Deutsche tried to turn its investment bank into a European rival to Goldman Sachs, an adventure that enjoyed some success until the financial bubble burst in 2008. But Deutsche then failed to do what the Wall Street outfits did – cut costs ruthlessly and adapt to a world where regulators demand fatter capital cushions. Sewing is now obliged to hit the panic button by culling 18,000 staff.
Better late than never? Well, yes, on its old course Deutsche was only a few missteps from becoming a political headache for Berlin. The new strategy, with a central ambition to service German businesses and retail customers, is definitely safer.
Yet the investment bank is not disappearing. Only the share trading arm is being cut. The fixed-income division – meaning bonds and interest rates – will be shrunk but will still be large. Such a half-in, half-out strategy is unproven. Rivals will call it half-hearted, and try to poach clients. As at Barclays, there will be temptation to climb back on the equities rollercoaster when market conditions improve.
If Sewing had been able to find a buyer for Deutsche’s investment bank, he would surely have been rewarded with a big bounce in the share price. The reality, though, is that nobody wants a bloated business in a market with slimmer pickings. Executing a semi-retreat looks hellish.
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