Your weekly economic update from the team at FXD Capital
Rishi Sunak’s UK budget left me with more questions than answers. There are usually enough leaks in the preamble to budgets to make the final event seem more like a confirmation procession over a revelation. There have been rumours about raises to capital gains and income taxes (and even a new wealth tax) in the past couple of months. In the end, none materialised, and it leaves many questions about how the UK is going to pay for the increased spending incurred during the pandemic. Lackadaisical attitudes to money printing also bring an uncomfortable feeling against the backdrop of rising government bond yields.
With all the spending announced in the budget and the gap between concessions starting (such as corporation tax increases), it suggests that the government’s strategy is to roll the dice of economic recovery and hope that the rising tide lifts all boats.
I think the government has kicked the can down the road here, and the result with neither be sufficient for the country nor itself. Regarding the former, the increase of corporation tax to 25% by 2025 may not translate to increased tax collections, instead encouraging companies to reinvest cash flow for growth. Such a tactic has been the hallmark of technology companies over the past decade and has contributed to growth stocks’ success; Amazon, for example, has never paid a dividend. On the other hand, encouraging a more expansive, future-looking approach by dividend-hungry FTSE companies may benefit UK plc over the long-run, as they reinforce operations and invest for growth, over depleting reserves to pay out dividends. Plans will also be bolstered by the 130% “super deduction” of new asset investment.
For the government’s fortunes, the budget is a calculated gamble. If the economic revival succeeds and absolute returns reduce the deficit, it can enter the next election cycle on a wave. Yet, if it doesn’t, they will be backed into a corner and forced to make decisions they should have perhaps made now, at a time where there is less time for the electorate to forget the pain inflicted.
Away from the budget, which dominated the news, there were other noteworthy events in the UK this week. The sunset for LIBOR is nearing closer, as the FCA announced that figures for remaining currencies would cease to be published by the end of 2021.
Moves to make the FTSE more attractive for IPO listings in the face of increased competition have entered the lobbying phase between relevant parties. The argument relates to making more concessions on the use of dual-class shares and reducing minimum levels of free float. Deliveroo is mooted for a potential IPO soon; its status as a technology leader and desire to retain founder control through dual-class shares will provide an impetus for any shakeup.
Drama in the bond market continued this week, despite some early respite. 10-year yields touched upon 1.55% during comments by Jerome Powell at the Wall Street Journal Jobs Summit on Thursday.
Continual yield volatility is due to Fed sentiment remaining noncommittal towards changing course from the patient withdrawal of recovery support. Over recent weeks, there have also been issues with US Treasury liquidity, a $21 trillion market. Last Thursday, Primary Dealers (banks that underwrite US bond sales) were forced to pick up 40% of the sale of a new seven-year Treasury auction.
Europe provided some respite to the inflation narrative, as Eurostat’s flash estimate for January showed prices rising 0.2% on the month and 0.9% year-on-year. The delta between Europe and US figures will be pertinent in the coming months due to both regions being at disparate points related to lockdown conditions.
Continual lockdown restrictions and a struggling vaccine rollout take their toll, and recent data points to a double-dip recession in Europe. This week, Spanish unemployment hit a five-year high, and German retail sales fell for a second successive month.
All the best for the week ahead,
Our weekly column is written by Alex Graham, Economic Advisor to FXD Capital. Originally a bank treasurer, Alex’s weekly roundup intends to provide a conversational, top-down view of what is going on in world macroeconomics and how it impacts business on the ground level.
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