April Monthly Commentary

Another month, another dire warning from the economic great and good. In March it was the International Monetary Fund’s turn to warn that the world faces ‘economic derailment.’

As always, the blame was laid firmly at the door of the Chinese economic slowdown, with IMF second-in-command, David Lipton, warning that steps needed taking to boost global demand. ‘We are clearly at a delicate juncture,’ he said, which may well be IMF-speak for something rather stronger.

Interestingly, world stock markets did not seem to be at a ‘delicate juncture’ in March, with all the markets on which we report moving upwards in the month, some quite significantly. One of the reasons for this was remarks by Janet Yellen, Chair of the US Federal Reserve, suggesting that the US will now ‘proceed cautiously’ with regard to any future interest rate rises.

In the US, the Presidential race is increasingly looking like Hillary Clinton vs. Donald Trump – although that won’t be to the liking of the Economist Intelligence Unit. In the middle of the month their Global Risk Assessment ranked a Trump presidency equal to Jihadi terrorism as a threat to global economic stability. The Intelligence Unit gave the prospect of ‘the Donald’ entering the White House a score of 12. China experiencing a ‘hard landing’ was the highest threat at 20: the UK leaving the EU rated only an 8.

…And March was, of course, the month when George Osborne presented his Budget in the UK. But by the end of the month his plans for deficit reduction and moving next door to succeed David Cameron had been very much overtaken by the continuing crisis surrounding the UK steel industry.

UK

March got off to a good start in the UK. Nationwide said that house price growth was ‘steady’ in February, and McLaren Automotive announced plans to invest £1bn in 15 new models and employ 500 more staff. Car manufacturing was at a 10 year high and car sales for February reached a 12 year high.

There was the now customary claim and counter-claim regarding Britain’s possible exit from the EU, with Bank of England Governor, Mark Carney, describing it as the ‘biggest domestic risk.’

But in the first part of the month everything was leading to Chancellor George Osborne’s Budget on March 16th. His plans started to unravel even before the speech, when the much-heralded and widely-consulted-on plans for pensions tax reform were abandoned in the face of opposition from Conservative backbenchers.

The British Chambers of Commerce also contributed to a worrying backdrop, downgrading its forecasts for UK economic growth: the BCC is now expecting 2.2% growth this year, from a previous figure of 2.5%.

Nevertheless, the Chancellor still managed to deliver his customary confident performance, buoyed by figures released on the morning of the Budget showing that unemployment had fallen a further 28,000 between November and January and more people were in work than ever before.

‘Britain,’ the Chancellor declared, was ‘Set to growth faster than any other major economy in the world.’ However his forecast for growth this year was even lower than that of the BCC, at 2%. Growth would then rise to 2.2% in 2017 and then level out at 2.1% for the following three years.

These forecasts, the Chancellor was not slow to point out, were based on the UK remaining within the EU. Leaving, according to the Office for Budget Responsibility, ‘could usher in a prolonged period of uncertainty.’

So despite the world presenting what the Chancellor described as a ‘dangerous cocktail of risks’ everything appeared to be on course, with Osborne still committed to removing the Budget deficit in the lifetime of this parliament.

Sadly, everything then started to unravel remarkably quickly…

Iain Duncan Smith resigned and the Chancellor’s plans for cuts to disability benefits were abandoned even before they’d reached the Commons. Welfare u-turn leaves Chancellor with £4.4bn black hole screamed the headlines.

However, the news was to get significantly worse by the end of the month, as Tata decided to put its Port Talbot steel plant up for sale, potentially threatening anything up to 40,000 jobs (depending on which newspaper you read). As the month ended the Prime Minister was hosting a cabinet committee and desperately looking for a buyer: with the UK now a relative minnow in global steel production you suspect it will prove difficult.

There was one last twist of the knife in March. Figures released at the end of the month showed the UK’s current account deficit had ‘soared’ in the last quarter of 2015: the deficit in the three months to December was £32.7bn – equal to 7% of GDP in that quarter according to the Office for National Statistics.

What did the FTSE-100 index of leading shares make of all this excitement? Not much was the answer, although it did manage to gain 1% in the month, closing March at 6,175. The index is down 1% for the first three months of the year.

Europe

There was yet more woe for beleaguered carmaker, Volkswagen, in March as prosecutors in Europe decided to widen their investigations into the emissions scandal, whilst the head of the company’s US arm resigned.

In the wider European economy, unemployment across the whole Eurozone came down to 10.3%, but there are worries the European Central Bank’s stimulus package is starting to falter. Falling energy prices meant that the Eurozone stayed locked in deflation, with consumer prices down for the second consecutive month.

The ECB has cut interest rates to zero against the backdrop of the fragile global economy, and its stimulus package is now running at €80bn a month. It’s difficult to see what other action the Bank can take.

It was however, a better month for the major European stock markets. The German DAX index rose 5% in March to close at 9,966 whilst the French index was up 1% to 4,385. The two markets are respectively down 7% and 6% for the first three months of 2016.

US

We’ve commented above on Janet Yellen’s statement that the Federal Reserve will proceed cautiously with regard to interest rate rises, and this was in evidence in March with the decision to leave rates unchanged. The ‘Fed’ said that the labour market was expected to strengthen – the US created 242,000 jobs in February – but that it was still looking for inflation to reach its 2% target figure. We may not now see the four interest rate rises this year that were mooted in December.

There was good news when it was revealed that US economic growth for the final quarter of 2015 had been revised upwards from the initial estimate of 0.7%: this was increased to 1.4%, with the economy overall estimated to have grown at 2.4% for the whole of 2015.

Despite now reputedly sitting on a cash pile of $216bn Apple didn’t have things all its own way in March as it battled the FBI over the unlocking of the San Bernardino killer’s iPhone. In the event, the FBI managed to do it without Apple’s help in a move the company described as ‘dangerous’ and ‘chilling.’ You suspect that this story of law enforcement vs. the tech giants has only just begun.

There was nothing ‘dangerous’ or ‘chilling’ for the Dow Jones index in March, which rose 7% to end the month at 17,685. It’s up just 1% so far in 2016 – one of four of the major markets we cover to be in positive territory through the first quarter.  

Far East

There were contrasting views on the Chinese economy at the start of the month. Credit ratings agency, Moody’s, cut the outlook for China from ‘stable’ to ‘negative.’ Unsurprisingly, China’s chief economic planner took an entirely different view. Predictions of an abrupt economic slowdown ‘were destined to come to nothing’ said Xu Shaoshi, the head of China’s state planning agency.

The economic growth target for 2016 has nevertheless been cut to a range of 6.5% to 7% – compared to the 6.9% at which the Chinese economy actually grew in 2015.

China certainly doesn’t appear to be lagging behind in the knowledge economy, with the BBC reporting that the country is opening the equivalent of ‘a university a week’ – something which is contributing to a gradual shift in the composition of the world’s graduate population, with the trend inevitably being away from Europe and the US and towards the Far East.

There was good – or at least less bad – news in Japan, with the economy shrinking less than previously thought in the final quarter of 2015. Analysts had been predicting a reduction of 1.5% – in the event, the figure was only 1.1%.

The economy also slowed in South Korea, growing by only 0.7% in the final quarter of last year, compared to 1.2% in the previous quarter. Despite this, the South Korean stock market enjoyed a good month, rising by 4% to end March at 1,996 – up 2% for the first three months of the year.

Other Far Eastern stock markets followed a similar pattern, with the Chinese market up by 12% in the month to 3,004 – although it is still down by 15% for the first quarter of 2016. Japan was up 5% to 16,759 (down 12% for the first quarter) and Hong Kong rose by 9% to 20,777 (down 5% for the first quarter).

The three major emerging economies on which we report – Russia, India and Brazil – completed the ‘full house’ for us in March, with all their stock markets moving upwards in the month. Having started the month at 1,840 the Russian index ended at 1,871 – up 2% in the month and up 6% for the first quarter of the year.

There was a rather more spectacular performance in India, where the market rose 10% in March to close at 25,342 – however, it remains down 3% on a year-to-date basis.

Pride of place, though, goes to Brazil – for so long the source of nothing but bad news. The stock market powered up 17% in March to 50,055 and is now up 15% for the year. This came despite Brazilian oil giant, Petrobras, posting a record loss of $10.2bn for the last quarter of 2015 – thanks, inevitably, to the plunging oil price.  

And finally…

Competition for inclusion in ‘And finally’ has never been fiercer than it was in March. An early front runner was Google’s driverless car and its seemingly fatal attraction for other vehicles. Its far-too-close encounter with a bus was widely reported in the media.

No doubt encouraged by this, the DVLA announced that trials of ‘driverless lorries’ would take place on the M6 later this year. They’ll be choosing a ‘quiet stretch’ of the motorway in a move that will apparently save fuel – but presumably hit sales of Yorkie bars.

But pride of place for March went to the nation’s pets, and the news that pet insurance claims have hit a record. No fewer than 911,000 claims were processed in 2015, including a python that was treated for anorexia. Claims for dogs increased at almost double that of claims for cats, with ‘swallowed owner’s sock’ among those conditions showing an upward trend!

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