Graeme Wearden 

Mark Carney says Brexit is ‘acid test’, as world economy slows – as it happened

Bank of England governor is warning that the global recovery is slowing, trade wars are hard to win, and Brexit will be an important test
  
  

The Governor of the Bank of England, Mark Carney, who is speaking in London today.
The Governor of the Bank of England, Mark Carney, who is speaking in London today. Photograph: Hannah McKay/AFP/Getty Images

Finally, those Brexit worries ‘helped’ the London stock market to underperform vs other exchanges.

The FTSE 100 ended the day up 4 points at 7,133, while Germany’s DAX gained 1% and France’s CAC picked up 0.8%.

Decent results from tyre maker Michelin helped European car manufacturers.

Over in New York, the relief rally has now pushed the Dow up by 341 points, to 25,395 points.

Carney speech: What the media say

Here’s our economics editor, Larry Elliott, on governor Carney’s speech:

Brexit is an acid test of whether it is possible to reshape globalisation in a way that offers the benefits of trade while allaying public fears about the erosion of democracy, the governor of the Bank of England, Mark Carney, has said.

Speaking in London, Carney said the ramifications of the UK’s departure from the EU would be felt around the world and would determine whether it was possible to shrug off rising protectionism in favour of a new era of international cooperation.

The governor cited trade tensions and the result of the 2016 referendum as examples of fundamental pressures to reorder globalisation.

“It is possible that new rules of the road will be developed for a more inclusive and resilient global economy. At the same time, there is a risk that countries turn inwards, undercutting growth and prosperity for all.”

The FT’s Kate Allen was also struck by Carney’s comments on Brexit, and the dangers that a trade disruption causes:

“We are 45 days before the possibility of [no-deal happening] . . . we should not be under any illusions — no-deal Brexit would be a shock for this economy and send a signal globally about the prospects of refounding globalisation,” he said at the event, which was hosted by the Financial Times.

Asked whether Brexit was a canary in the coal mine for the new global order, Mr Carney replied: “The bird may be towards the bottom of the cage, but it is still fluttering.”

FT: Carney says Brexit offers ‘acid test’ on future of global trade

Sky News’s Ed Conway has mopped up some of the best charts from the speech (it’s not proper central bankers’ speech without a few visual aides)

The Telegraph’s Tom Rees has flagged up Carney’s warning that a trade war could cause an economic crunch not seen since the mid-1970s.

As the governor put it:

Most fundamentally, the larger and the more permanent the disruption to global trade—the greater the de- globalisation—the greater the reduction in both activity and supply capacity of economies. The latter—a material hit to supply—is something that advanced economies have not experienced since the mid-1970s.

In this scenario, the combination of slower growth, smaller surpluses in Asia and higher risk premia could move global interest rates higher, increasing the burden of corporate and household debts and challenging the creditworthiness of some sovereigns.

Charles Hepworth, Investment Director at asset manager GAM, says the Brexit deadlock is making some UK assets ‘untradable’.

Here’s his take on the situation as we rattle towards Brexit Day with no certainty over the future:

“Negotiations are stuck with the EU refusing to concede on any points – the already agreed deal is the final deal as far as they are concerned. And to be honest it’s probably the same view that May is taking – both essentially running down the clock to the final vote date. Thursday sees the start of extended debate in Parliament as to what happens next as they vote on ‘Plan B’ and the rest of the alphabet options.

“However not much really can come next – all that she hopes will happen is that those who voted overwhelmingly against her in her first attempt to pass the original deal through Parliament may be spooked that with so little time left and with the prospect of no-deal being so disastrous that they will have to switch to support her original deal. This uncertainty would be reflected in increased sterling and market volatility and, cynically, the government could use market turbulence to its advantage to push through a deal. It’s a supremely high stakes game of chicken she is playing with both the EU and the UK parliament. She reaffirmed her promise to allow the final vote on her ‘probably unaltered’ original on the 27th of this month. Einstein’s definition of lunacy was to keep doing the same thing over and over again and expecting a different result.

“The government’s actions are negative for the UK economy, currency and assets – which don’t look tradable to us at this point. The question remains what happens should the prime minister’s efforts fail again? Delaying the March deadline and trying again wouldn’t be beyond the realms of the lunacy so far we have seen in Parliament. The other avenue is a hard Brexit which has no support at all and so cannot be expected to happen. There is still the faint likelihood of the “People’s vote” option – I’m undecided if that ship has sailed yet. Right now it seems that delaying until her deal is forced through Parliament is the most likely option.”

Back in the markets, Wall Street has opened higher, on relief that another US government shutdown has probably been averted.

The Dow Jones industrial average has gained around 1%, with the broader S&P 500 and the tech-focused Nasdaq also posting gains.

London’s early rally has fizzled out, though - the FTSE 100 is now flat, after Theresa May continues to run the Brexit clock down.

Back on Brexit, governor Carney is hammering home the need for certainty, warning that the situation could go “quite badly”.

But he also agrees that the economy has strengths, such as the state of household and corporate balance sheers, readiness of financial sector for Brexit and the long-established strengths of the economy.

Carney also suggests that global conflicts could be the trigger that ends the global expansion.

Mark Carney is now taking some questions about his speech (highlights start here).

The FT’s Chris Giles whizzes a fast delivery at the governor:

Q: Are you saying that Britain is the canary in the coal mine for the new world order, and it’s not going very well….

Carney is tempted into playing the metaphor, joking that:

The bird may be towards the bottom of the cage, but it’s still fluttering.

He then explains that Brexit is a leading indicator - but the factors that led to the the Brexit vote are also building in other countries, and will create new challenges there too.

So policymakers need to rethink trade rules, and adjust the balance between rules made domestically and beyond.

As Carney puts it

The fundamental issue at the heart of the Brexit discussions - …. are ones which the global economy needs to grapple with.

Thus, it will be “a source of deep concern” if the Uk and EU can’t reach an agreement, as it won’t be a good leading indicator of how other countries will cope with similar challenges in the future.

This is why the Bank of England is concerned about China’s slowing economy:

During his speech, Mark Carney also cites the idea that globalisation has created an impossible “political trilemma”. Basically, that we can’t have democratic accountability, national sovereignty AND be fully integrated in the global economy.

Any two is fine, but the hat-trick is impossible (ie - a eurozone country surrenders some sovereignty when it joins the single currency, while any country loses democratic accountability if the IMF imposes bailout conditions).

It’s an idea created by Harvard academic Dani Rodrik (see here).

As Carney puts it:

Globalisation leads to imbalances of democracy and sovereignty, leading many to lament a loss of control and to lose trust in the system. As Dani Rodrik has argued, there is a trilemma between economic integration, democracy and sovereignty.

Common rules and standards are required for trade in goods, services and capital, but those rules cede or, at best pool, sovereignty. To maintain legitimacy, the process of agreeing those standards needs to be rooted in democratic accountability.

Much will be required to create a more inclusive, sustainable globalisation but part of the solution is a more flexible and open trading system for services and for small and medium enterprises.

Updated

Mark Carney also warns that Brexit has hurt the UK economy - and is a warning of the damage that global trade uncertainty can cause.

Citing yesterday’s weak UK GDP report, he says:

UK business investment has fallen 3.7% over the past year despite the ongoing expansion, high business profitability and accommodative financial conditions.

With fundamental uncertainty about future market access, UK investment hasn’t grown since the referendum was called and has dramatically underperformed both history and peers

Carney: Brexit will be 'acid test' of new global order

Mark Carney rounds off his speech with a pop at Donald Trump, telling his audience at the Barbican that “Contrary to what you might have heard, it isn’t easy to win a trade war.”

And he concludes with some eye-catching comments on Brexit, saying it’s important to reach a “solution” in the coming weeks.

Britain’s departure from the EU, he says, will be an ‘acid test’ of whether politicians can achieve a new form of international co-operation, while respecting democratic accountability.

As the governor puts it:

If the UK has been somewhat more inwardly focused of late, it has been for good reason.

In many respects, Brexit is the first test of a new global order and could prove the acid test of whether a way can be found to broaden the benefits of openness while enhancing democratic accountability. Brexit can lead to a new form of international cooperation and cross-border commerce built on a better balance of local and supranational authorities. In these respects, Brexit could affect both the short and long-term global outlooks.

And finally, he returns to that old explorer, Sir Martin Frobisher, who we heard about a few minutes ago.

It is in the interests of everyone, arguably everywhere – from Frobisher’s grave to Frobisher’s Bay - that a Brexit solution that works for all is found in the weeks ahead.

Some tweets from Mark Carney’s speech:

Turning to globalisation, Carney says it has brought “widespread prosperity”, but it has also created external imbalances — with large trade surpluses in some countries (eg Germany), and deficits in others (eg UK) (corrected!).

Plus, the benefits haven’t been shared evenly:

Rather, the benefits from trade are unequally spread across individuals and time. Consumers get lower prices and new products, and further benefits from higher productivity over time.

Some workers, however, lose their jobs and the dignity of work, or see their “factor prices equalised.” In plain English, their wages fall.

Updated

Carney: recessions are difficult to spot

Mark Carney cites the risk of China’s slowing economy, the push for “de-globalisation”, and rising protectionism as key threats.

He also warns that policymakers may struggle to spot a recession, until it happens:

Given the confluence of the current broad-based slowdown and outstanding downside risks, some are beginning to wonder whether the global expansion, begun in 2010, could be starting to end.

Recessions are notoriously difficult to predict. The IMF has anticipated only a sixth of the over 300 recessions in member countries since 1991. Financial markets are more likely to cry wolf, making Paul Samuelson’s observation fifty years ago that “the stock market has predicted nine of the past five recessions” as relevant today as it was then.

For what it is worth, market-implied probabilities of a recession in the US are around 20%, nearly three times higher relative to this time a year ago.

Mark Carney says the deceleration in the world economy is partly because central bankers have begun tightening monetary policy (through higher interest rates), as they (slowly) unwind the stimulus packages created after the financial crisis.

But there is another culprit -- trade wars.

The BoE governor says:

Potentially more seriously, the slowing in global momentum may also be the product of rising trade tensions and growing policy uncertainty.

Carney: Global economic picture is darkening

Over in the Frobisher Hall at London’s Barbican, Mark Carney is delivering his speech on the global economy.

The Bank of England governor begins with a nod to his Canadian homeland, telling his audience that their location is named after Sir Martin Frobisher, an English navigator who scoured Canada’s eastern arctic coast in the 16th century looking for new trade routes.

(apparently most of Sir Martin’s remains are buried in the St Giles-in-the-Fields churchyard, although St Andrew’s Church in Plymouth snaffled his heart and entrails).

Carney says there is a link between Sir Martin and the world economy:

Martin Frobisher is perhaps more famous in Canada than in his native land. One of the great bays in the eastern arctic is named after him. The capital of Nunavut, Iqaluit, lies at the innermost end of Frobisher Bay.

Nine years ago this month Iqaluit hosted the G7 meeting that marked the start of the euro crisis. Events that still reverberate today including in the environs of the Barbican.

That G7 meeting also treated us to the sight of Carney’s predecessor, Mervyn King, taking a somewhat undignified trip on a dog sled.

Conditions today may look better than in 2010, when the world was struggling back from the financial crisis. Carney, though, sees problems ahead....

While the debate in the United Kingdom has been understandably dominated by Brexit, the world has been otherwise engaged.

When the Referendum was being held, the global economy was emerging from a long period of financial repair and lacklustre growth. Over the subsequent two years, a widespread and increasingly vigorous global expansion took hold. For the first time since the financial crisis, business investment and foreign trade grew strongly across all major regions. Economic uncertainty diminished, and consumer and business confidence firmed. In economies close to full employment, real wages finally began to grow.

A new beginning seemed possible.

In the past few quarters, however, these trends have largely reversed. After peaking a year ago around 4%, global momentum is now weakening in all major regions and downside risks have intensified. The proportion of the global economy growing above trend has fallen from four-fifths to one-third. Trade growth has slowed and the export outlook has dimmed. Capital goods orders are stagnating, investment growth has become more tepid, and business confidence is diminished.

Updated

Heads-up. Bank of England governor Mark Carney will be speaking in London shortly, about the world economy, and key risks to the global outlook.

The oil price has also risen today, on hopes of a trade breakthrough in Beijing. US crude is up almost 2% at $53.37 per barrel.

US delegation land in Beijing for trade talks

An aeroplane carrying top US officials had landed in Beijing, ready for their crunch meeting with China vice-premier Liu He (president Xi’s top economic advisor) later this week.

U.S. Treasury Secretary Steven Mnuchin told reporters that his team are “looking forward to several important days of talks”.

Remembering his manners, Mnuching thanked everyone for turning up at his hotel to greet him, saying it was “great to be here back in Beijing” (following earlier talks in December).

That’s fine, as far as it goes -- but it’s not a hint that a trade deal will be reached this week.

Some US officials have already been holding talks at the China’s Ministry of Commerce yesterday, and today. They’re led by led by deputy U.S. trade representative Jeffrey Gerrish.

Updated

Wall Street is expected to open higher in three hours time, following those gains in Asia and Europe.

Here’s how Royal Bank of Canada sums up the scene:

Asia-Pacific equity indices were in the green overnight, led by Japanese stocks which rallied over 2%, amid growing risk-on sentiment after President Trump’s optimistic remarks about China in a rally in Texas saying he would “make great deals on trade” and that he doesn’t want China “to have a hard time”. This speech came soon after an advisor told Fox the president might hold talks in Florida with Xi Jinping next month.

Adding to the positive risk-on sentiment, lawmakers have agreed to a provisional border security deal in order to avoid another government shutdown. The plan includes $1.375 billion for border fencing, however, falling short of Trump’s $5.7 billion, according to Bloomberg reports.

BAML: Trade war is top risk

Although stocks are up today, there’s still plenty of nervousness out there about the long-term prospects for equities.

Bank of America Merrill Lynch’s latest fund manager survey, just released, shows that the US-China trade war is the top ‘tail risk’ worrying investors, followed by a Chinese economic ‘hard landing’.

The survey also shows that money managers moved out of stocks and into cash this month, a sign they’re worried that a correction could be approaching (given the rash of weak economic data and profit warnings).

The survey also shows that investors believe buying emerging markets stocks is the most crowded trade out there -- which could be a problem if everyone heads for the door at the same time.

Maybe it’s something to do with the weather (the sun was spotted over the City this morning), but City experts are in an optimistic mood.

Kit Juckes of Societe Generale says the shutdown breakthrough, and hopes of a US-China trade deal, have raise spirits.

I got to work with markets in a pleasant mood and spring threatening to break out in London. It was all going swimmingly until Word froze..... ah well, nothing lasts for ever....

The US government shutdown seems to have been averted and there’s a strong chance that import tariffs on Chinese goods will be postponed. Risk is on.

Paul Donovan of UBS also sees reasons to be cheerful, saying:

Good news flows from the US. US President Trump has indicated (albeit not with the majesty of a tweet) that great trade deals are just around the corner. An administration official hinted at a meeting between Trump and Chinese President Xi “soon”. As trade taxes are effectively a tax on equities, this has been well received by Asian risk markets.

The US Congress may also be approaching the point where they do not need to shut down the government (again). A possible deal on a border wall has been agreed by negotiators from the two parties. This may reduce fears about the scale of partisan disruption later this year.

Updated

Government urged to fix 'flawed' RPI inflation measure

Just in: MPs and Lords are calling for Britain’s “flawed” RPI inflation measure to be fixed.

The House of Commons’ Treasury Committee and the House of Lords’ Economic Affairs Committee are jointly demanding that the government gives the UK Statistics Authority the authority to amend known problems with RPI.

RPI typically gives a higher reading than the consumer prices index (CPI). Thus, it’s unfair that the government uses RPI to raise the price of things we pay for - such as season tickets and student loans - while relying on CPI for benefits such as pensions.

[the problem is that RPI uses a different formula than CPI, and also includes housing costs, so house prices and interest rates moves can make it volatile]

The Stats Authority themselves say that RPI is “a very poor measure of inflation”, and refuse to class it as a national statistic. However, it still calculated it each month.

Rt Hon. Nicky Morgan MP, Chair of the Treasury Committee, is damning about RPI’s

“As the Treasury Committee has concluded in numerous reports and statements over the years, RPI is a flawed measure of inflation, and it is absurd for the Government to continue to use it.

“It appears grossly unfair that Government formulae affecting people’s incomes, such as pensions and benefits, often use CPI, whereas formulae affecting outgoings, including student loans, often use RPI, which typically gives a higher rate of inflation.

“The Committee has previously urged the Government to abandon the use of RPI, which has been de-designated as a national statistic. Failing this, the Chancellor should at least consent to UKSA correcting the known errors in the RPI formula.”

RPI was 2.7% in the year to January, while CPI came in at 2.1%. Clearly at least one of them is failing to measure the cost of living properly.

Back in 2017, the FT’s Chris Giles pointed out that RPI shows that women’s vests and strappy tops have quintupled in price since 2010, while CPI only has them becoming 20% pricier. That’s because of an adjustment (now clearly a mistake) made in 2010, which hasn’t been fixed.

Now that might seem just a wacky talking point, until you remember that RPI is also used to calculate how much interest is paid to investors who own UK government debt. They’re at least £15bn better off thanks to RPI, which means taxpayers have LOST £15bn.

Back in the UK, shares in struggling retailer Debenhams have surged 40% (yay!) to the giddy heights of, umm, 4.5p, after it secured a funding lifeline.

The new £40m credit facility should help Debenhams keep operating, as it continues to negotiate with its lenders to restructure its debts.

Sergio Bucher, the chief executive, hailed the new 12-month credit facility as a “first step in our refinancing process”.

It comes after three profit warnings in 2018, and warnings that the company would not survive without a debt deal.

Even after today’s rally, Debenhams is only valued at around £53m - versus debts of over £280m

Weidmann: Eurozone isn't crisis proof

If the US government crisis is averted, investors will be free to worry about other issues - such as the eurozone.

And one of the front-runners to replace Mario Draghi as head of the European Cenral Bank has just warned that the euro area isn’t fully protected from another crisis. He cited the fact that many eurozone banks are big holders of their own national debt, which amplifies any financial problems.

Bundesbank President Jens Weidmann told an audience in Pretoria that:

“Certain issues like the lack of credibility of fiscal rules or the harmful sovereign-bank nexus still have to be adequately addressed.

Weidmann - a hawkish critic of some of Draghi’s measures to save the euro - also warned that central bankers are being force to take political decisions beyond their remit.

“Acting beyond the mandate would also undermine people*s trust in the central bank....At the end of the day, it could become more and more difficult for the European Central Bank to focus on its promise of a stable currency.”

European stock markets have all jumped in early trading, following gains in Asia overnight.

Germany’s DAX is leading the way, up almost 1%, while in London, the FTSE 100 is up 25 points or 0.35%.

Earlier, China’s Shanghai index gained 0.7%, Australia’s S&P/ASX picked up 0.3%, while the Nikkei’s 2.6% jump is the standout performance (exporters surged as the yen dipped against the US dollar)

Naeem Aslam of Think Markets says investors will be relieved to hear that another US government shutdown can be avoided.

No one wants to see another government shutdown, especially after a historic one which wasn’t too long ago. These government shutdowns adversely impact the economic health of the country.

Resolving the trade war issues with China would also “really improve the sentiment in the markets”, he adds.

Donald Trump has put a brave face on his failure to get full funding for his wall with Mexico.

At a rally in El Paso, Texas, Trump declared:

“Just so you know, we’re building the wall anyway”.

(Just not as much as he’d hoped).

That talk will play well with the Trump base; some attendees at the rally were carrying signs urging him to “Build the Wall”.

But - possibly in a precursor to the 2020 presidential campaign - Trump found himself vying for attention with Democrat Beto O’Rourke who held his own rally in Texas.

O’Rourke took a rather different approach to the situation, telling his crowd that:

“With the eyes of the country upon us, all of us together are going to make our stand here in one of the safest cities in America. Safe not because of walls but in spite of walls.”

The agenda: Shutdown deal pushes markets up

Good morning, and welcome to our rolling coverage of the world economy, the financial market, the eurozone and business.

A burst of optimism is rippling through the markets this morning, after US lawmakers reached a tentative deal to avoid another government shutdown.

Overnight, Democrats and Republicans agreed a new spending package, which includes some more money to fund border security. Assuming president Trump signs it off, the deal will keep the Federal government running beyond Friday.

After weeks of deadlock, Republican Senator Richard Shelby emerged to tell reporters that “an agreement in principle” had been reached, and that staff would be “working feverishly to put all the particulars together.”

The deal will provide some money to construct fencing on the US-Mexico border, but this really doesn’t look like a win for Trump.

That’s because Congress is only providing $1.4bn for extra border security, not the $5.7bn the White House had asked for.

As my colleague Tom McCarthy explains:

The agreement would allocate far less money for Trump’s border wall than the White House’s $5.7bn wish list, settling for a figure of nearly $1.4bn, according to congressional aides. The funding measure is through the fiscal year, which ends 30 September.

The agreement means 55 miles of new fencing — constructed through existing designs such as metal slats instead of a concrete wall — but far less than the 215 miles the White House demanded in December. The fencing would be built in the Rio Grande Valley in Texas.

Money has also been set aside for technology such as advanced screening at border entry point, humanitarian aid, and additional customs officers.

News of the breakthrough boosted markets in Asia, where Japan’s Nikkei jumped by 2.61%, or 531.04 points, to end at 20,864.21.

European markets are expected to rise at the open too.

The deal comes as US officials prepare for fresh talks with China over the trade war - another Trump bugbear that has been worrying the markets. Treasury secretary Stephen Mnuchin and trade representative Robert Lighthizer are due to meet Chinese Vice Premier Liu He in Beijing on Thursday.

Yesterday, White House adviser Kellyanne Conway revealed that president Trump is still keen to meet China’s Xi Jinping “very soon” to hammer out a deal, saying:

“This president wants a deal. He wants it to be fair to Americans and American workers and American interests.”

Given the slowing global economy, investors would welcome a breakthrough - before even more tariffs are imposed on US and Chinese goods.

Also coming up today

Bank of England governor Mark Carney is speaking about the global economy, and risks to the outlook, at an event in London, organised by the Financial Times. Trade wars will probably come up.

Otherwise it’s a quiet day.

The agenda

  • 1pm GMT: Bank of England governor Mark Carney discusses the global economy

Updated

 

Leave a Comment

Required fields are marked *

*

CAPTCHA

*