Can interest rates really stay flat for another three years? That is what the markets are now saying about UK base rates and if that is right then there has been a radical shift in outlook over the past six months. Remember that last autumn Mark Carney was suggesting people should expect the first increase in UK rates about the turn of this year – that is three months ago. If the governor of the Bank of England can misread markets, what hope is there for the rest of us?
So the first thing to look for now will be how markets react, after a weekend’s due consideration, to hints, warnings and suggestions last week from several central bankers that rates would stay low for longer. Even in the US, which has already had one increase, the mood has shifted from expecting three or four more rate rises this year to one or two. That at least was what was read into cautious comments by Janet Yellen, chair of the Federal Reserve. The best way to catch a feel will be to look at long-term rates: will ten-year gilts and US treasuries rise or fall?
Second, close followers of the US presidential campaign may have noticed that Donald Trump has just warned of the US heading into “a very massive recession”, in an interview with the Washington Post. Unemployment is already much higher than reported, he asserted, and this is “a terrible time right now” to invest in the stock market. Whatever view you take of the Donald’s statements on politics, such a clear position on the economy will attract notice. Property developers are supposed to know about the economic cycle. So we will have two tests, the first this week. Do investors take any notice of his views? If there is no market reaction, then the answer will be no.
The second test will take longer. It will be how this particular call on the economy will look in a couple of years’ time. If there is indeed a recession, especially a massive one, then whatever happens between now and November, he will at least have seen been to call that one right. And if there is merely a slowdown, quite likely actually, then we will know he is no Warren Buffet after all.
Third, back home there will be some UK PMIs – purchasing manager indices – which will give us a feeling as to whether there really has been a slowdown in the UK economy. Last week the GDP numbers for last year were upgraded, but of course that is historical. The PMIs give a feeling for how the economy might be moving a few months ahead. First come results for construction on Monday, but more important will be the services figures on Tuesday. It is very simple. Services cover two-thirds of the economy, so if they remain positive growth overall will also be positive. Recently the signals have weakened a little: there is still growth but not so overwhelmingly so. If they pick up, we can relax a while. If not, then the present sense of unease, fuelled to some extent by the whole Brexit issue, will persist.
That leads to a fourth issue: to what extent is Brexit hitting growth? We know it has hit sterling, but that now is so-to-speak “in the market”. The recent fall of the pound takes into account a danger that the leavers will win. There is no evidence yet of it hitting growth, indeed at the margin the fall of the sterling exchange rate will be boosting growth by helping exporters. It is anecdotal, but there may be some investment plans being postponed for a few months to see what happens. Look out for any stories of this happening, stories that will naturally be grabbed by the remainers.
Pressure on steel
And finally, the biggest story of all as far as Britain is concerned, what will the next stage be in the Tata Steel sad saga? There will be some form of government intervention, because there has to be, and something will be preserved of the Port Talbot complex. What we have really very little feeling for how much will be preserved and for how long? Governments are not impotent and this government is desperate to show that. But while governments can write cheques they cannot run businesses.
Still, given that to some extent the pressure on the steel industry has been the result of government energy policy, there is more than the usual “something must be done” pressure on it. The thing to look for will be whether this event shifts this government towards a more active industrial policy in the future.
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