One of the main drivers of the UK public finance data which arrives later is the state of the UK economy. There we find that the solid GDP ( Gross Domestic Product) growth of recent years has been replaced by slower more marginal growth in 2017 so far. Also the attempts of the Bank of England to boost the economy via its extra monetary easing of last August are hitting the problems described by former HM Treasury Permanent Secretary Nick Macpherson like this yesterday.
QE like heroin: need ever increasing fixes to create a high. Meanwhile, negative side effects increase. Time to move on.
It raises a wry smile to see a latter-day Sir Humphrey agree with me although Nick did in fact move higher in establishment terms as he is now a Lord. Also it is easy to say it now after the damage has been done it would have been much braver to say it against the establishment consensus at the time.
One of the areas where stresses in the UK economy are being seen are in the car and car loan markets. As I wrote only on Friday these were fed by the way that the finance subsidiaries of the car manufacturers have been able to step into the market via what are rental deals dressed up as purchases. This will have been oiled by the Bank of England £435 billion of QE and £80.3 billion of its Term Funding Scheme. Whilst the latter specifically helped banks and building societies the aim was ” to support additional lending to the real economy,” Was it a further push for the car market?
The problem after the boom for the car market is that you pump it up so much that you then get a bust. On Friday I pointed out that incentive schemes and subsidies being provided by the manufacturers are a sign of trouble ahead and today the BBC is reporting this. From the BBC.
Ford is the latest car company to launch an incentive for UK consumers to trade in cars over seven years old, by offering £2,000 off some new models.
Unlike schemes by BMW and Mercedes, which are only for diesels, Ford will also accept petrol cars.
All of the part-exchanged vehicles will be scrapped, Ford said, which would have an “immediate positive effect on air quality”.
Old cars, from any manufacturer, can be exchanged until the end of December.
There is of course an addition for my financial lexicon for these times as we discover a price cut is in fact a “positive effect on air quality”.
I have regularly pointed out the dangers of the surge in unsecured lending in the UK that was also fed by the Bank of England “Sledgehammer” QE and Bank Rate cut of last August. One of the places you would look for trouble is in the area of subprime lending where Provident Financial has released quite a tale of woe this morning. Let us go back only a month.
The group has continued to exercise strong discipline around credit and not observed changes in customer behaviour in relation to either demand for credit or credit performance.
And this morning.
Collections performance is currently running at 57% versus 90% in 2016 and sales at some £9m per week lower than the comparative weeks in 2016. ………….The pre-exceptional loss of the business is now likely to be in a range of between £80m and £120m.
That is a bit different to a pre exceptional profit of £60 million. How much can you lose in a month? This is the sort of Forward Guidance we associate with central banks. Yet again we see a banking organisation which chooses to be “economical with the truth” to coin a phrase and try to drip feed or manage bad news. It has not gone well today with the Chief Executive gone, the dividend scrapped, and a FSA investigation into one of the subsidiaries. The share price is not for the faint hearted because as I type this it is £6.78 or down some £10.67 on the day.
I do hope that someone will ask Bank of England Chief Economist Andy Haldane about this as he undertakes his UK tour which if the FT coverage is any guide seems to be part of an effort to make him the next Governor. After all it was entirely predictable ( please look at my past updates on here) that unsecured lending would boom and lead to trouble just like it has in the past. Andy’s “Sledgehammer” QE lit the blue touch-paper.
A Fiscal Stimulus?
I ask this on several fronts. Let me open with this from former Chancellor George Osborne on BBC Radio 4 Today earlier. From the BBC.
Former Chancellor George Osborne has urged the government to build high-speed rail lines across the north of England, from Liverpool to Hull.
Mr Osborne, who launched the “Northern Powerhouse” initiative when in government,
The so-called HS3 railway project seems a much better idea than HS2 but then almost anything is. A weak minority government is always likely to succumb to such ideas and I was thinking of that as I noted this in this morning’s public finance release.
Over the same period, central government spent £245.9 billion; around 5% more than in the same period in the previous financial year.
Actually some £4.1 billion of this is extra debt interest. An awkward number when you consider we have such low yields as we mull a fiscal stimulus to holders of UK Gilts! What is happening here is the consequence of the rise in inflation as index-linked Gilts use the Retail Price Index which rose in July at an annual rate of 3.6%.
Revenue is not bad
Whilst it was eclipsed by the spending growth revenues did beat the official inflation data comfortably.
In the current financial year-to-date, central government received £226.6 billion in income; including £168.1 billion in taxes. This was around 4% more than in the same period in the previous financial year.
Indeed if we look at July specifically there was some hopeful news from the self-assessment numbers.
This month, receipts from self-assessed Income Tax increased by £0.8 billion to £8.0 billion, compared with July 2016. This is the highest level of July self-assessed Income Tax receipts on record (records began in 1999).
This meant we had a small surplus in July but that the fiscal year so far saw an extra £1.9 billion of borrowing compared to last year.
There are two ironies today. The first is that on a day when I was thinking about public sector debt we get a reminder of the troubles in private debt via the unsecured sector and subprime in particular. Next is a timing irony as this from Ann Pettifor hints at.
Former chairman of Northern Rock given a platform by
@thetimes to opine about “principles” shows how corrupt is the British establishment.
So a former chairman of a past subprime lender gets a media soapbox on a day new subprime fears see signs of a coming to fruition? The phrase credit crunch has many meanings but a flicker of it seems likely to be added to by the fact that official restrictions on outward investment from China seem to be biting. From City-AM.
Chinese conglomerate Dalian Wanda has ditched plans to buy London’s Nine Elms Square, it was announced this morning.
Meanwhile the Bank of England and its Governor Mark Carney are “Vigilant.”