Confounding ‘experts’ everywhere, the twin impacts of Brexit and the election of Donald Trump in America have so far failed to derail the post-financial crisis economic recovery in the UK. Earlier this month the Bank of England again raised its growth forecast for 2017, this time to 2%, despite predicting that economic output would slow sharply in the wake of the ‘no’ vote last June. Notwithstanding falls in retail sales in December and January, consumer spending has largely held firm, aided by strong employment trends, low interest rates and record personal borrowing. Asset prices from stocks to houses are still riding high, fed by strong liquidity trends and monetary stimulus. Additionally the EY Item Club yesterday predicted that stronger growth would foster a modest reduction in public sector borrowing to £65bln this year. All good news.
Sterling has remained weak since the referendum, boosting exports but imported inflation is starting to impact on food and energy prices, placing additional pressure on household incomes and the resilient consumer. With inflation likely to peak somewhere near 3% later this year, interest rates are likely to rise in very late 2017, early 2018 but to do so very slowly.
Attention shifts to Europe…….
As we head further in to 2017, the triggering of Article 50 and closer to European elections deemed critical for the future of the Euro and the EU itself, it’s worth looking briefly at the latest round of headlines in the on-going economic and financial crisis in Greece and what it implies for Europe as a whole.
Greece is currently on its third bailout programme and is now seven painful years in to an economic crisis triggered by the global Financial Crisis of 2007/08. At the same time the country has been on the front line of Europe’s migrant crisis. The country is slowly growing again, supported by a robust tourist sector and an improving labour market, but not one of the bailout programmes has really addressed the structural reforms required in Greece and Europe as a whole – (instead the focus has been on deep spending cuts and tax rises.) Neither has the question been answered as to what to do with a country that has fallen so far behind the conditions required for sustainable Euro membership or why a country contributing less than 2% of European GDP is deemed so critical to the survival of the single currency and the trading bloc itself?
It’s true that most Greeks see themselves as inherently European, with no desire to leave the Eurozone, let alone the EU itself. Either outcome would be seen as a huge failure and a symbol of national shame. Therefore, in order to preserve membership, ordinary Greeks have put up with the kind of extreme deprivation prescribed as by the EU/IMF/ECB Troika likely deemed unacceptable in most European countries. By the same token, European politicians, facing a wave of populist revolt, anti-globalisation protest and multiple elections, cannot risk another full-scale Eurozone crisis or the prospect of another leaver. As such Greece is likely to remain in one bailout programme or another and to be paying back its creditors until 2060 at the earliest.
The particular inflection point of the latest iteration of this Greek tragedy surrounds a key debt repayment test in July this year. Greece needs around 7bln Euros in new rescue funds to meet this critical summer deadline. Worries about this payment and future funding emerged after the IMF, which declined to participate in the third bailout plan in 2015, revealed a split over how much more austerity should be imposed on Greece. The IMF has long warned that Greek debt is unsustainable without significant debt forgiveness, which the EU is unwilling to provide and calls in to question the fund’s participation in the next bailout round, due mid 2018. Germany, for it’s part, has warned that IMF participation is crucial, whilst Greek politicians have indicated an unwillingness to accept further austerity.
Signs that this uneasy standoff may reach a conclusion emerged after yesterday’s Eurogroup meeting in Brussels. Group head Jeroen Dijsselbloem announced that representatives of the IMF and EU would return to Athens to thrash out an ‘additional package of structural reforms’ to support long-term growth and debt sustainability with less emphasis on austerity. However, he warned not to expect an agreement before next month’s Dutch elections or even the French Presidential elections in May.
It is likely that this latest round of the Greek crisis will be resolved with one deal or another but is unlikely to provide a solution for the longer term. Events in core Europe this year may, in any case, overtake those currently afflicting the periphery. However, finding a sustainable way to reform Europe, beginning with smaller economies in greatest need, is crucial if Europe is to survive in its current form.
Mike Harris – Investment Director