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10/03/2017

Weekly News Bites: Spin doctors

Our top picks from this week's Morning Chat

Spin doctors: The Trump administration announced its first real policy, a plan to repeal and replace "Obamacare". It is being savaged by Democrats for leaving millions of poor people worse off. However, much more notably, it is also being attacked by many notable Republicans. While the Congressional Budget Office, a non-partisan government "accounting" agency, has not issued its opinion, most objective reviews conclude the new plan will cost more while insuring fewer people. This will engender little faith in the new administration’s "moon shot" promises regarding the economy. (08/03)

Frankfurt calm, Brussels sprouts: At least two important announcements will take place today in Europe. First, the European Central Bank will apprise us of its latest interest rate decision. Expect the status quo – low rates and massive quantitative easing – but watch for any hints of pullback. Second, European Union leaders will issue a joint statement in Brussels; it is expected to be a paean to international trade. Now that the US appears to be pulling back from global commerce, European leaders have found rare agreement on entering the vacuum left behind. (09/03)

A Spring in his step, for now: In Chancellor Phillip Hammond’s first and final Spring Budget – budget announcements having been pushed to Autumn – he had plenty of reason to be upbeat about the near-term fiscal picture. It's what happens next year and beyond where things get more tricky. Highlights below:

  • GDP growth: Higher now, lower later, but still growing... Economic growth in 2017 will be better than expected in November (now 2.0%, upgraded from 1.4%) but then it gets hit hard over the next two years as "Brexit" begins to hurt (now 1.6%, downgraded from 1.7% in 2018; and 1.7%, downgraded from 2.1% in 2019).
  • Deficit: Falling, but still no balance on the horizon... The government will keep on spending more than it collects in taxes well into the next decade, but expects the deficit to fall under 1% of GDP in 2020/21 from around 3% levels now. If this stays on track, I'll eat my hat.
     
  • Overall debt: More manageable than expected… The UK debt is expected to peak at 89% of GDP next year; previous estimates had it topping 90%. It then is expected to fall for the first time in years, going down to 80% in 2021/22. If this turns out to be true, I will eat two hats.
  • Inflation: Staying high for a while... Forecast to hit 2.4% this year, then fall to 2.3% in 2018 and 2% in 2019. This a remarkably long tolerance for above target inflation, as rates are expected to stay at historical lows throughout.
     
  • The gorilla-elephant hybrid sitting in the front pew: A "control-F" of the speech showed no mention of the word "Brexit". "Negotiations" got two hits. Here is one of them: "As we start our negotiations to exit the European Union, this Budget takes forward our plan to prepare Britain for a brighter future." The other was even more staid. (09/03)
     

Take a running Juppe: Alain Juppe – the leading Republican candidate to replace beleaguered Francois Fillon in the French election – dropped out of contention, not wanting to be "Plan B". There is now little choice for the party but to accept Mr Fillon, warts and all. The Republicans, and the Socialists – after having dominated French politics since the 1980s – are now both officially in tatters. As a result, 39-year old maverick centrist Emmanuel Macron is expected to go head-to-head with far-right National Front leader Marine Le Pen in the second round; polling indicates he will waltz to victory. (07/03)

Passive aggressive: Standard Life and Aberdeen Asset Management shares were both up 6% yesterday, respectively, as investors cheered the union of these two Scottish fund management heavyweights. The combined scale will allow them to save on shared regulatory and technology costs. Further value lies in complementary investment expertise: Aberdeen is a champion in emerging markets; Standard Life focuses on developed markets. However, looking beyond the near term synergy, the deal is a long-term bet on the future of active management in a world hurtling towards cheap, passive instruments. It will wish for better luck than one other Scottish financial behemoth which attempted a transformational merger. (07/03)

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