The Month That Was……May 2019

Changes at the top of the political tree will ensure that May 2019 will be a significant month in modern history.

 

The concern now is the economic reality of three years of Brexit ‘nothingness’ and no solution being imminent. In fact a change of Prime Minister delays everything further. What a farce.

 

Here’s how May 2019 will be remembered……

Economic Issue #1 - Broken Brexit

Brexit claimed its second Prime Minister since the referendum in 2016……and who is to say it will be its last.

 

As a last throw of the dice, Theresa May promised a “bold offer” to all political parties on Brexit. However, this was essentially an act of representing her withdrawal bill yet again but with a thicker font.

 

Within 48 hours of intense political pressure, Theresa May made a painful and tearful resignation speech and that was that. As soon as she walked back in to Number 10 and the door was closed, the process of electing a new Conservative leader (and Prime Minister) was underway.  

 

Michael Gove, Jeremy Hunt, Boris Johnson, and Dominic Raab are the front runners to replace her, with Boris Johnson the red hot favourite to win the leadership contest. In reality, it will be the candidate with the most ‘likeable’ Brexit policy that will win.

 

Boris Johnson said in 2003: "I have as much chance of becoming Prime Minister as being decapitated by a frisbee." I think I speak for many when I say……please, please, please keep hold of your frisbees for the next few months!

 

Many argue that Boris Johnson is the biggest threat to Jeremy Corbyn becoming Prime Minister. I would argue the biggest threat to Jeremy Corbyn has always been Jeremy Corbyn.

 

Seriously though, any candidates with a chance of winning will have to (a) insist they have a better, tougher negotiating stance which will bring results from the EU and (b) insist they are ready in a way that Theresa May never was to embrace no deal.

 

I am not sure which is worse……selecting a new leader of the sixth largest economy in the world based on their stance on Brexit or leaving it to 150,000 members of one political party to decide the next Prime Minister. I’m not sure we signed up to that as part of the referendum. 

 

There are a few things we do know for certain:

 

Firstly, the current outlook for a ‘no deal’ Brexit looks far closer than a deal being struck given the new Prime Minister is likely to need to renegotiate with the EU given the lack of confidence in Theresa May’s grand master plan.

 

Secondly, the economy continues to stutter and stall whilst there is such uncertainty. How many more British Steel and car manufacturing jobs need to go before W1 gets this. There are real consequences to the lack of future certainty happening outside of London……if only MPs looked further afield.

 

3 years wasted……how many more can we afford to waste financially? We live in dangerous times as no deal creeps closer.

Economic Issue #2 - Bull in a China Shop

Aside from Brexit, the next biggest threat to our economy is the trade war between the US and China.

 

When you’re an ego maniac and the publicity goes quiet 18 months before your quest for re-election there is only one thing for it……pick an economic fight with your biggest competitor. Brilliant. Great thinking The Trump.

 

The latest round of tariffs affects a wide range of Chinese goods, from Christmas lights and vacuum cleaners to seafood and modems. They mark a dramatic escalation in a trade conflict that has simmered since The Trump entered the White House.

 

And this is the bit that The Trump doesn’t seem to get……he thinks that China pays the tariffs rather than US businesses and consumers with higher priced goods. How can someone with such power not understand how this will significantly impact their own economy so negatively?

 

Trump appears to be gambling that the American economy is strong enough to withstand any blowback from the trade conflict. A strong performance in the first quarter of the year has certainly strengthened his hand.

 

Or perhaps he is gambling the US voters aren’t bright enough to understand they have to pay for the tariffs one way or another.

 

The Trump really is frightening.

Economic Issue #3 - Greecey Italy

Aside from Brexit and US v China, ignoring Italy’s economic problems is like ignoring an unexploded bomb.

 

Though not on its death bed, Italy is certainly chronically ill. Based on International Monetary Fund (IMF) figures, net public debt of $2.6 trillion was 1.2 times the size of its economy last year and will be almost 1.3 times by 2025 because it is not growing its way back to fiscal health. Only Greece and Japan are worse among advanced nations. Italy has just escaped its third recession in a decade.

 

Were Italy not the third largest economy in the eurozone and eighth largest in the world, you could be forgiven for thinking it was a struggling emerging country. But it’s not. As the world learnt in the dark days of the Eurozone sovereign debt crisis from 2010 and 2012, Italy is not only too big to fail…..it is too big to bail.

 

Rescuing Greece cost almost €300 billion, the biggest bailout in history. Those funds paid the debt that Athens owed its creditors. Italy’s debt is multiples larger. This year alone, it must raise €220 billion. To put it another way, a Greece-sized rescue package would get Italy through little more than a year. The Eurozone’s pockets simply are not deep enough.

 

Making matters worse is the ‘doom loop’ between Italy’s banks and the state as Italian banks are big holders of state debt. On one hand, that’s a good thing……as much of the interest paid by the Government will, in theory, go back into the economy through the banking system (rather than leaking abroad). But it also creates a dangerous vulnerability.

 

Today, Italy is more fragile than ever……its credit rating is just two notches above ‘junk’, At last month’s IMF meetings, Italy was considered a bigger threat than a no-deal Brexit.

 

You might have thought Brussels would be pulling Italy into line. But it can’t. Brussels may be able to draw up rules on bendy bananas, but when it comes to stuff that matters it is remarkably toothless.

 

Italy’s growth and debt problems are now so severe that its fate is intertwined with that of Brussels. It is an unexploded bomb and time is running out.

Economic Issue #4 - UK Interest Rates

Interest rates are staying where they are because an overheating economy is the lesser evil.

 

Brexit has been blamed for many things: weighing on economic growth, deterring overseas investment, leaving holidaymakers out of pocket and driving up inflation. But one crime nobody has dared pin on it is Brexit causing a super-charged economic overexpansion. Until now……that is the implication of the Bank of England’s latest interest rate decision and Inflation Report forecasts.

 

The Bank of England’s outlook paints a picture of an overheating economy. In 2022, the last year of the forecast, inflation is 2.2% (above the 2% target). Joblessness is 3.5%, well below the Bank’s 4.25% estimate of the natural rate. The economy is 1% bigger than it can manage.

 

Despite this, the monetary policy committee unanimously chose to ignore all the warning signs and leave interest rates on hold.

 

Why?

 

In short, a no-deal Brexit could kill economic growth so why slow it now by increasing interest rates!

 

Overheating is the lesser evil.

May’s Biggest Loser……Option 1 (of 1) – Theresa May

There can only be one loser this month…… Theresa May.

 

Albert Einstein’s definition of ‘insanity’ springs to mind……“doing the same thing over and over again and expecting different results.”

 

Theresa May asked MP’s repeatedly to accept the same deal they emphatically said “no” to originally and expected different results. This really is insanity.

 

Whilst it is only natural to feel empathy for Theresa May’s tearful resignation speech, ultimately she caused the environment that we are in and there is no getting away from that.

 

Yes she had an almost impossible job trying to deliver the almost impossible……but she really didn’t help herself and, ultimately, didn’t have the human skills, political leverage or warmth of personality to bring 650 MPs together to find a middle ground.

 

She has failed and the history books will report so on her legacy. She was in above her head. Elected because all the more suitable candidates eliminated themselves and she never had quite what it takes to be Prime Minister. Every day she showed her greatest failing……a total lack of political imagination.


May’s Government was a festival toilet on wheels careening down a hill toward a children’s face painting booth. Messy.

 

Now the baton will be handed on……and I fear dropped again.

And Finally……

Imagine a democratic society so broken and untrusted that a pollical party that is only 6 weeks old with no manifesto and only one policy (leave the EU with no deal) is the most attractive option in European Elections and wins the most votes. Welcome to the UK in 2019!