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Categorized | Currencies, Equities

FT City Network: Is the outlook all doom?

Posted on January 31, 2016

View of London at night fromTim Peake on board International Space Station©ESA/NASA

View of London and the City at night fromTim Peake on board the International Space Station

Several City leaders have warned about the global economic outlook, citing a “doomed” post-crisis environment in “a world of zeros” where central banks grapple over whether to further unwind ultra-loose monetary policies.

Nigel Wilson, chief executive of Legal & General, said: “We are heading for a world of zeros: including zero inflation, zero growth in per-capita GDP and zero growth in productivity.”

    His comments were echoed by the UK fund manager Helena Morrissey, of Newton Investment Management, who told the Financial Times: “If ‘doomed’ is that the post-crisis experiment in attempting to use asset inflation to generate sustained growth is unwinding, and that confidence in the ability of central bankers to always be able to do ‘whatever it takes’ to preserve the wealth of those that seek to front-run official liquidity injections, then the answer is probably ‘yes’.”

    Other City chiefs also voiced bearish views in the latest online debate of the FT City Network, a forum of more than 50 financiers, business leaders and policymakers. They were responding to questions about recent low-key economic forecasts from George Osborne, the chancellor, and Mark Carney, governor of the Bank of England.

    A fortnight ago, Mr Carney said: “The year has turned and, in my view, the decision proved straightforward: now is not yet the time to raise interest rates . . . The world is weaker and UK growth has slowed.”

    The change of tone echoed a more downbeat prognosis from the chancellor, who warned last month that unless the UK kept to tough economic reforms, 2016 could mark “the beginning of the decline for the country”.

    Yet despite the even gloomier comments from Ms Morrissey and Mr Wilson, the majority view from the FT City Network was more balanced. John McFarlane, chairman of Barclays, said: “I doubt disaster is looming,” adding that he trusted the US economy to “rise and lift all others”.

    Win Bischoff, FRC

    The heroic outperformance of the UK economy is unlikely to continue in 2016 and beyond to the same extent as in the last two years. It will, however, remain sound.

    Expectations for that continuation needed to be cut back. Politicians and central bankers can do this as well as company CEOs when reducing guidance! I do not see this as anything but sound realism and a sensible update.

    2016 is going to be tough for all the reasons mentioned in the last few weeks, not only by the chancellor and the [BoE] governor. At the same time there is no suggestion at this time that we will have another recession.

    John McFarlane, Barclays

    John McFarlane©Getty

    Well, how things turn. The past years evidenced a two-tier world, with emerging markets and oil rich countries the darlings, and the developed world still in recovery from the global financial crisis.

    This said, we have seen relatively normal strength in the US and UK, with Europe as a whole weak, but certain countries strong. No longer. China’s correction and with it emerging markets in general, and unpredicted low oil and resource prices have brought uncertainty, and strangely enough, some normality to things.

    It’s always unreliable to predict outcomes in the eye of any storm

    It’s always unreliable to predict outcomes in the eye of any storm. My sense is we need to digest the new normal and wait for clarity. I doubt disaster is looming and things slowly will get better if not exciting. In my mind the US economy is key here. I’ve always trusted it in the past to rise and lift all others, and feel that will deliver again.

    Regarding monetary and regulatory policy, it’s really hard to see divergence so where’s the surprise in similar statements? Rates are unusually low, and the currency weak. While in the medium term we all expect higher rates, sudden moves are uncompelling. Inflation is hardly a worry either. Once greater clarity emerges on long term direction, I think the Bank will ease into rate rises gradually. In the meantime, at most it will be a little and then not much to follow immediately thereafter. I worry less about how it happens and more about getting it right. Remember, we’re all in this together, like it or not.

    James Bardrick, Citigroup

    James Bardrick Citigroup

    We have to be careful not to generalise, as even within regions, country situations and outlooks are so different. As I hear from many of my colleagues and our clients around our global network of over 100 countries, they view 2016 from their local and regional vantage points with an uneven range of perspectives.

    In Latin America, for example, Mexico, Brazil, and Argentina are not in the same place and whether it’s Asia, North or Latin America, Africa, Middle East or Europe, you need that local perspective because all those economies are in various states of development, recovery, and, increasingly, challenge.

    Others have already referred to the outlook in the US, the UK and Europe, so I will focus on the substantial drop in commodities, which creates real problems where you have emerging economies built and structured to have 4 per cent to 6 per cent growth rates.

    I’m also keeping a close eye on the economic situation in Russia

    The issues are compounded when there is a high dependence on the export of commodities, especially oil or minerals, to fund government programmes and the local economy and normally combine with high debt levels in the economy by historical standards. So, I am concerned about the slowdown in China and the market volatility we are seeing there today.

    I am also keeping a close eye on the economic situation in Russia, as well as the impact of sustained low energy prices on those countries with oil export economies. I would also expect Brazil to remain in recession in 2016, potentially exacerbated by unpopular fiscal policies.

    However, there are others that are well positioned to benefit from these macro trends, like India and Mexico.

    Slowdowns and recessions can and will occur in some countries although I would hope that the huge amount of work done since the last crisis should mean that a much stronger and more resilient banking and finance industry weathers the storms.

    Where does the politics come in? I would hope that similar announcements by finance ministers and central bankers mean that their views are aligned rather than politicised.

    Much more important is the increasing interaction between geopolitics and economics. There are obvious links between the turmoil in the Middle East, terrorist attacks around the world and the migration crisis, and between migration and European politics, and between tensions in Europe and politics in the UK. The refugee crisis is one of the biggest political risks for the EU in 2016. The most impactful political signposts for 2016 include the US presidential elections in November and the UK referendum on EU membership (probably sometime this summer).

    The refugee crisis is one of the biggest political risks for the EU in 2016

    Unscheduled political developments such as government collapses followed by snap elections may also emerge.

    Citi has highlighted the risk of “Merkel-exit” as a key risk to watch for Europe, given the importance of her leadership to not only Germany but the wider EU project.

    One danger is that governments with limited political capacity will increasingly lack the power — or the will — to address these risks with anything other than the piecemeal, “just in time” policies. Until now, financial markets have taken a relatively sanguine view of political events, treating them as regional and idiosyncratic. One of the main factors insulating markets from geopolitical risk has been abundant liquidity provision by central banks. As the Fed begins to raise rates, that support may begin to wane.

    Citi has highlighted the risk of “Merkel-exit” as a key risk to watch for Europe

    We may be entering a new phase, where policymakers, including central banks, have less power to mitigate risks. That said, a range of positive outcomes and “silver linings” may also emerge. Increased co-operation between Russia and the West over the Syria crisis is possible in 2016, potentially leading to an improvement in ties that dropped to their worst level in decades. 2016 could also see co-operation between Turkey and the EU to address the refugee crisis, potentially reviving broader relations.

    David Morgan, JC Flowers

    I don’t believe the two pronouncements [by Mr Osborne and Mr Carney] are further proof of politicisation of the UK’s monetary policy and financial regulation.

    Normal parts of the job of central bank governors are to provide credible views on the economic situation and outlook — both domestic and global — and help promote a well informed public policy debate on monetary policy and financial regulation.

    Central bank independence on monetary policy has generally worked well for all relevant constituencies. I believe it will — and should continue to be — jealously guarded not just by central bankers but also others, including the politicians.

    Financial regulation has been less insulated from politicisation than has monetary policy. Appointment of a truly first class chief executive to the FCA would be a welcome next step forward in this regard.

    Helena Morrissey, Newton

    Helena Morrissey, founder of the 30 Percent Club and chief executive officer of Newton Capital Management, poses for a photograph following a Bloomberg Television interview during the Milken Institute London summit in London, U.K., on Tuesday, Oct. 28, 2014. The summit brings together opinion makers, executives, investors and philanthropists during the Institutes two day event. Photographer: Simon Dawson/Bloomberg *** Local Caption *** Helena Morrissey

    If “doomed” is that the post-crisis experiment in attempting to use asset inflation to generate sustained growth is unwinding and that confidence in the ability of central bankers to always be able to do “whatever it takes” to preserve the wealth of those that seek to front run official liquidity injections, then the answer is probably “yes”.

    At Newton we have been mindful that rather than the pricing power and consumer price inflation that ultra-loose policy was supposed to create, we have instead witnessed the creation of an abundance of capacity across a wide range of sectors and industries.

    With the report published [recently] co-authored by former BoE governor Mervyn King for the Swedish Riksbank echoing our view that “models that not only didn’t, but couldn’t by their nature, predict the [2008] crisis were unlikely to tell the whole story of the difficulties facing economies during the recovery phase”, we would not be surprised to see current events unfolding into a more challenging period for markets and the UK economy.

    The Bank of England’s Funding for Lending Scheme started a slippery slope towards a 1970s style industrial policy supported by the central bank

    Re the second part of the question, I’d suggest that arguably the politicisation of UK (and wider) monetary policy and financial regulation has already occurred. The Bank of England’s Funding for Lending Scheme started a slippery slope towards a 1970s style industrial policy supported by the central bank. Everything is connected.

    Given that the interest rate set by a central bank cannot be an exact science and is invariably influenced to some degree at least by political aspects (and sometimes very obviously so, for example the Bank of Japan’s change in monetary policy at the behest of the new Prime Minister Abe and his appointment of the like-minded Mr Kuroda in 2013) it seems more probable that history will look back on the era of ‘independent’ central banking as the anomaly.

    Jean-Pierre Mustier, Tikehau

    Jean-Pierre Mustier, the former investment-banking chief of Societe Generale SA, arrives at the court house in Paris, France, on Wednesday, June 9, 2010. Societe Generale SA had no choice other than to unwind Jerome Kerviel's unauthorized trading positions immediately after they were discovered, the former head of the French market regulator told a court. Photographer: Antoine Antoniol/Bloomberg *** Local Caption*** Jean-Pierre Mustier

    We need to learn again to live in a more volatile financial world, brought by a major change of central bank policy. Capital markets are global and any decision of the Fed impacts them in a disproportionate way, even if the catalysts today can be the oil price or worries about the Chinese economy.

    But more volatility does not mean the return of the 2008 crisis, the environment is very different: banks balance sheet are much stronger, their short or long term refinancing is not an issue. In the UK and Western Europe, the environment is relatively supportive: lower oil price should be a positive for our economies, as should lower currencies, still accommodative central bank policies and the relaxation of some of the fiscal policies. Such correction might not signal a recession but will bring in a more reasonable valuation for various assets classes which were too stretched, like equity of credit.

    Politicians or central bankers are right to warn about the environment, and we should not look for more than that. But it is as well fair to say that the uncertainty of the political environment linked to Brexit needs to be taken into account by the central bank and might force the governor, far from being a politicisation of his function, to comment about such event as he already rightly did for the Scottish referendum.

    Nigel Wilson, Legal & General

    Thursday 14th February 2013 Nigel Wilson, CEO of Legal and General. Photographed at OSB.

    As a consequence of significant mis allocation of global capital there is an unnecessarily high probability that we are heading for a world of zero’s; including zero inflation, zero growth in per capita GDP and zero growth in productivity.

    Substantial structural reform is required to encourage step changes in new investment across infrastructure, technology and people which will drive growth in productivity and remedy the over capacity in old industries and the under capacity in new industries.

    Without reforms economic, social and political risks will continue to rise.

    From 2009 to 2015 central bankers, governments, business and investors were aligned as the combination of $60tn of QE led credit growth coupled with the windfall gains to business from lower interest rates and lower taxes alongside the hollowing out of middle management and deferral of capex drove excessive asset price inflation and increasing inequality.

    As a consequence of significant mis allocation of global capital there is an unnecessarily high probability that we are heading for a world of zero’s

    In 2016 the certainty of the Bernanke and Draghi puts has ended, however the risks and uncertainty associated with the $200tn of global debt remains. Market prices are now responding to market data — excess supply causes prices to fall eg oil, increasing default risk reduces banks values (Chinese banks have PEs of around 4 and several major western banks trade at a discount to book value) and reduced growth decreases business values everywhere.

    The good news is that the US, China and Germany all have sufficient financial firepower to stimulate their economies through supply reforms whilst Japanese corporates sit on cash balances equivalent to 70 per cent of their GDP The outcomes are that we are all likely to have to work longer, pay more taxes and make greater contributions to long term care and improving our digital skills. This will require significant international constructive collaboration between government, business and regulators.

    Rhydian Lewis, RateSetter

    We are not witnessing the start of a financial crisis of the ilk of 2008. Rather, global markets are simply moving in sync with the economic cycle. Crises occur when people don’t expect them and when supposedly robust mechanisms fail. That is unlikely to occur in any imminent downturn — there will be economic and financial losses but not an existential crisis. This economic slowdown is probably already under way.

    Monetary policy is working hand in hand with fiscal policy — easy money and low rates offsetting fiscal austerity. It makes sense for these two policies to work in a co-ordinated manner — they have been for the last 5 years. Financial regulation appears politicised at the moment because the government has removed the last head of the FCA and is setting the tone of a more conciliatory approach to the financial sector.

    Both monetary policy and financial regulation always have a political element — the former intertwined with the fiscal situation and the latter always subject to political appointment — but so long as there is institutional separation there are sufficient checks and balances not to be overly concerned. What’s more, the nuts and bolts of Western financial regulation is set as much globally as it is locally which mitigates overt politicisation.

    Brenda Trenowden, 30 per cent Club


    We are coming off an extended QE high which staved off Armageddon, alleviating some of the symptoms, but hasn’t put the world back on a prudent path of sustained economic growth.

    There is an ongoing and concerning dislocation between economic fundamentals and asset price inflation. The majority of large corporates in the UK have been able to amass cash with a bias towards share buybacks and M&A over capital investment. This, combined with a clear shift from low-yielding fixed income into equities and real assets driven by the search for yield has overheated the equity markets. This reinforces the dislocation between markets and economic fundamentals.

    Outside of the top tier corporates, balance sheets are not in such a strong position and there are clear credit quality concerns. On top of that, the Brexit debate doesn’t help as markets and businesses don’t like uncertainty.

    At ANZ we are particularly focussed on China, where the consumer confidence index fell to a record low, coinciding with the lower-than-expected Q4 GDP growth in 2015 and confidence on the five-year economic outlook also worsened in January. China will likely settle in the next 18-24 months and then continue to grow, but not at the pace that we have seen in recent years.

    UK economic data

    Economic growth

    GDP economic dashboardThe pace of overall economic growth halved in the first quarter of the year, in spite of a joint boost from sliding oil prices and the incipient eurozone recovery. While the data was worse than expected, most economists remain optimistic about the prospects for growth this year.

    Clearly, sustained low oil prices and falling commodity prices are positive in terms of key inputs to industry and my economist reminds me that falling oil prices are not normally the backdrop for a recession. In the UK unemployment has normalised, and this is in the face of record high labour market participation.

    So where does this leave us? I think to John’s original point, the current environment represents a “new normal” and we will have to wait to see how it plays out. Yes, UK growth is slowing, but it is because the recovery has matured. We don’t see a recession on the cards.

    On the second question, monetary policy and financial regulation are of course subject to some political influence and to James’s point, it’s good to see some ‘alignment of views’ in such a challenging economic environment.

    I would add that as a Canadian working for an Australian bank, I see immigrant flows as a net positive, so I liked Christine Lagarde’s recent comment — “The current surge in refugees is a challenge with an upside potential. With appropriate policies, this rich source of human capital can be harnessed with benefits for everyone.”

    Fiona Woolf, CMS Cameron McKenna

    I share Helena’s view that everything is connected. We must factor in to the “new normal” the investment implications of the agreement in Paris on climate change which includes a commitment to increase ambition.

    Simon Walker, IoD

    At Home with Simon Walker, Hammersmith, London

    [Are we doomed?] On the contrary. Notwithstanding the febrile behaviour of currency and stock markets, I — and most of our members — feel optimistic about prospects for 2016, particularly in Britain.

    Anxieties about the Chinese economy are understandable but overdone. The readmission of Iran to the international fold brings opportunities as well as risks, and the fundamentals of the main western economies remain sound.

    In Britain the number of people in work is at a record high, wage growth is 2 per cent against a backdrop of near zero inflation, and, notwithstanding the real misery of families hit by structural shifts, unemployment is as low as it is likely to get. The government is gently reining in spending. Fiscal and monetary policies remain sensibly synchronised and both the Chancellor and Governor of the Bank of England are appropriately cautious.

    The moaning minnies and doomsayers may dominate the headlines now, but in due course the prophecies of gloom will fade and normal service will resume. The fundamentals are satisfactory: the message has to be “keep calm and carry on”.

    And in years to come historians will marvel at the way it was once thought acceptable for politicians to set interest rates on the basis of the electoral cycle.

    David Roberts, Nationwide

    David Roberts, Nationwide©Bloomberg

    I am struck that when I talk to business leaders and consumers operating in the real economy they remain resolute and reasonably confident, whereas leaders in financial markets are uniformly bearish and despondent. It is interesting to question why this disparity exists.

    In my view, a sustained global liquidity surplus has led to a surge in commodity and emerging markets to name but two. This has inspired asset inflation, leveraged by QE, as opposed to increases in consumer demand, and the hoped for rise in business investment has not transpired. As a consequence financial markets have become dislocated from the real economy. What we are now seeing is an inevitable and necessary rebalancing as unrealistic growth expectations are reduced and financial markets “get real” with consequent asset price falls.

    The challenge therefore is whether the “real economy” in the powerhouse countries remain strong. This will be driven in large part by confidence; for businesses to invest and consumers to spend. The reduction in energy costs and the consequent decrease in inflation should put more money in people’s pockets and should result in greater spending, assuming expectations of employment and wages remain strong. Bank balance sheets remain strong, corporate balance sheets are very strong and hence the transmission mechanisms remain robust.

    In the UK it is also important to consider if the reduction in asset prices moves across into the housing market, as this would directly and quickly impact confidence

    In the UK it is also important to consider if the reduction in asset prices moves across into the housing market, as this would directly and quickly impact confidence. My sense is this is quite possible in high-end city centre properties, but probably not in the remainder of the market as the fundamental mismatch between supply and demand and low financing costs support prices. As such, whilst turbulence in the economy remains likely for some considerable months as imbalances unwind, the real economy is likely to remain relatively resilient and hence recession will be unlikely.

    My plea would be for government to use this dislocation as a reason to drive fundamental supply side investment; for sustained investment in infrastructure, skills, research and in particular support for technology deployment to shape and reinvent markets. The business case is sound and the UK needs this to compete successfully.

    Paul Drechsler, CBI

    I think there is little to add to feedback you have received, which is consistent. There is some necessary correction.

    There is still lots of uncertainty on many fronts. Different countries and sectors are experiencing different dynamics — it depends where you operate.

    Leadership is also about providing signals and confidence not contagion. Uncertainly and volatility are sure to prevail for some time to come. And of course, there is a referendum to contend with.

    Helen Alexander, UBM

    Just because we see the Bank and the Chancellor going in the same direction doesn’t mean we are seeing politicisation

    In the real economy, there is some nervousness, not least caused by the bearishness in the financial markets. But resolute and reasonably confident most firms remain, and they look with some surprise at the volatility of the markets. The world is in a very different place from the times of the crises we remember recently, and balance sheets are generally much more sound. If — if — we can keep that position, recession is not the most likely scenario.

    And meanwhile, just because we see the Bank and the Chancellor going in the same direction doesn’t mean we are seeing politicisation.