Economic Nuclear Winter?

 

It’s fair to say that the first half of 2016 has been a rollercoaster for investment markets. An oil price crash, China being China, the U.K.'s vote to leave the European Union and weaker than expected corporate earnings results across the region has created a cocktail of uncertainty for the second half of the year.

 

Whilst our focus will be on the new Government at Westminster, the economic stimulus action they take (or not) and their plans for firing the brexit gun, perhaps our attention would be better focused on the banking sector as our ‘yard stick’.

 

You see the banks are a bigger deal in many ways than the Government as they only have tax and spending cuts to play with in reality. Whereas the banking sector is the oil that keeps the economy turning by providing the cash for businesses to survive and thrive, provide consumers with money they don’t have so they will still spend (we are a consumer driven economy after all) and they account for £1 in every £10 made in the UK as a whole. The banking sector is a big deal.

 

So rather than focus on Westminster for a guide on the direction of travel over the next 6 – 9 months, it is the banking sector that perhaps gives us the best clues……and it is fair to say UK and European banks are preparing for the worst and a very tough six months ahead. 

 

The current uncertainty over when the U.K. will start the process of quitting the EU has banks on tenterhooks as most banks are multi-national with operations across the UK and Europe. Banks are now preparing for an economic nuclear winter and have strategies in place that take into account the worst case scenario that could happen by the end of this year.

 

What does worst case look like? A hardy mix of Article 50 being triggered, referendums in other European countries leading to a break-up of the Euro and Sterling plummeting further against the Dollar.

 

All scary stuff but there is a balancing argument that really should be considered……Brexit could be organised, orderly and with all parties happy with the terms, referendums in other EU countries can take years to organise and Sterling may hold up well against the Dollar as a consequence.  

 

Time will tell……the one thing for sure is that there are uncertain times ahead as we are in unchartered waters.

Not Catching A Cold Any More?

 

It’s fair to say that the UK is pretty much obsessed with the USA, its politics, its economy and all things that could impact our back-pocket. Just look at the exposure that Donald Trump and Hilary Clinton had on UK TV, radio and social media in their recent political sparring……and that’s before they go at it for the Presidency in November. Expect nothing other than 24 hour coverage.

 

The expression used to be that when America sneezes, the UK catches a cold, such is the importance of their economy to the UK……times might be changing though.

 

All eyes have been on the Federal Reserve (think Bank of England with a strange accident) this week to judge if interest rates are likely to rise in the USA. What was interesting in the minutes of their recent meeting was the reference to the UK. In fact, not just a reference but clearly quoted opinion on the UK economy over 20 times (mainly due to Brexit).

 

So are we a bigger deal than we thought in the USA? Well, it certainly caused the Federal Reserve to split its vote and not raise interest rates……that’s big enough a ‘deal’ in my eyes.

 

We perhaps should remember that when we are at the negotiating table with our American cousins……we no longer need to be the nodding lap dog that too many UK Governments have been over the years.

 

Interesting times.

Message Received Loud & Clear

 

All the talk of the Bank of England, Mark Carney, macroeconomics, interest rates, et al over the last few weeks means little to the masses until it is delivered in a medium and message that actually matters to them.

 

Enter Santander and their 1-2-3 account.

 

The 1-2-3 account heavily marketed by Santander is a juggernaut in the bank savings world as the interest rate has been market leading for years. However, it announced this week that it is cutting the interest rate 3% to 1% on the back of the Bank of England reducing its base rate. In Olympic terms……it is Jessica Ennis-Hill going from gold to silver……still good and a commendable effort but not as good as before. 

 

The initial message to anyone with a Santander 1-2-3 account is not to switch in anger now because the 3% interest rate holds until November.

 

However, the bigger message should be one of concern for savers. With inflation rising and savings interest rates falling, there is the real prospect that the safe haven of bank based savings could actually create a loss for savers in real terms. Or to put that another way……the interest rate being lower than inflation.

 

Now imagine if interest rates turn negative and you have to pay for a bank to hold your money for you whilst inflation keeps rising……it’s a car crash waiting to happen. (see my previous blog 'Bank of Mattress'

 

 

All in all, savers earning less interest can only have a detrimental impact on consumer confidence (and in turn the economy).

 

Not good.

The One Thing You Don't Do Is Nothing

 

Bank of England boss Mark Carney turned into a financial action figure last week and rode into the City slashing interest rates to 0.25%. This was pretty dramatic stuff……the Bank of England has been around since 1694 and interest rates have never been this low.

 

So what’s going on?

 

The UK economy has turned into a bit of a spluttering Ford Escort and the thinking behind cutting interest rates is to inject some turbo fuel into the engine. The concept is pretty simple and well used in the UK……if the cost of debt is cheaper then businesses will be more likely to borrow, to employ, to make stuff and in return, the public will be more willing to ‘spend spend spend’ and avoid steering the Ford Escort into a recession.

 

So that’s the theory, but the reality looks like this:

 

• Savers are stuffed. Their already meagre returns will evaporate further.

 

• The £ against $ is getting hit further as the UK looks even less appealing to Mr and Mrs International.

 

• Pension holders looking to buy an annuity will scratch their head in bewilderment.

 

• There is a little cheer for mortgage holders on a variable rate though (about 50% of borrowers) as they could see mortgage payments reducing……but that assumes the banks pass on the interest rate reduction!

 

And whilst all this goes on, we have a complete lack of action or urgency from the Chancellor who seems happy to ‘wait and see’ until the Autumn rather than be proactive in using the tools available to him (tax cuts, spending incentives, etc.).

 

I am a great believer that “the one thing you don’t do when things aren’t going well is nothing”. Over to you then Mr Hammond!

Bank of Mattress

 

It isn’t something we have ever really contemplated seriously in this country, but there is the real possibility that we may have to pay banks for having money with them if interest rates turn negative.

 

With the base rate currently at 0.5% and many bank savings rates around this level, any downward movement by the Bank of England could see savings rates turn negative. Or to put that another way……how would you feel about paying the bank 0.5% - 1.0% each year to look after your money?

 

There is no doubt that many savers would struggle to get their head around this but that is a real possibility. So much so, that Nawest have already written to business customers to confirm that the bank has a clear intention to force account holders to pay to hold money with them if interest rates are reduced / negative.

 

And this isn’t unique to the UK……Denmark, Sweden, Switzerland and Japan have had negative interest rates for some time.

 

However, a move to negative interest rates in the UK would turn a key part of banking on its head, with banks effectively being paid to store people’s money. In effect, savers would be penalised for keeping money in bank accounts rather than under the mattress.

 

The Bank of Mattress could become very popular again!