Ministers make progress on compromise after US and France clashed over big tech levies
Rolling coverage of the latest economic and financial news, including the Office for Budget Responsibility’s new stress test of the UK economy
- Newsflash: OBR warns Britain risks ‘full-blown’ recession
- Here’s why no-deal would hurt
- No-deal Brexit could wipe 2% off GDP
- Borrowing would rise by £30bn
- Watch the OBR’s press conference here
Finally, here’s our updated news story on the Office for Budget Responsibility’s fiscal risks report, and its concerns about Brexit.
A no-deal Brexit would plunge Britain into a recession that would shrink the economy by 2%, push unemployment above 5% and send house prices tumbling by around 10%, according to the government’s independent forecasting body.
In an assessment of the impact of Britain leaving the EU without a deal at the end of October, the Office for Budget Responsibility said the result would be a year-long downturn that would increase borrowing by £30bn a year.
Over in New York, shares in Netflix have plunged by 10% in early trading.
Netflix disappointed Wall Street last night by reporting a drop in US-based subscribers, for the first time in eight years. It also missed its target for international subscriber growth, putting some blame on recent price increases.
Netflix shares open around 10% lower after the firm announced a sharp drop in subscriber growth in Q2 (+2.7M vs +5.3M exp) pic.twitter.com/buF8xnCtjK
Long term chart of Netflix which is down 10% today trading at $328 … pic.twitter.com/8Bgf2E3Evu
There’s not much market reaction to that vote, even though it underlines that MPs won’t accept a no-deal Brexit.
The pound is still up almost half a cent today at $1.247, and up half a eurocent at €1.112.
Newsflash: MPs have backed an amendment that would try to stop Boris Johnson shutting down parliament in the autumn to facilitate a no-deal Brexit by 315 votes to 274.
That’s a majority of 41, rather larger than expected.
More names abstaining: Stephen Hammond, Tobias Ellwood, Huw Merriman and Anne Milton also believed to be abstaining say Tory rebels
Wow big victory
– govt defeated 274 to 315
– govt loses by 41 votes
– Margot James has resigned as DCMS minister
– Cabinet abstentions including Clark Hammond Stewart Gauke. Will May ask them to resign
Consumers appear to be shaking off Brexit uncertainty, by driving retail sales up last month.
Retail spending jumped by 1% in June, partly due to Brits having a good old rummage through the local antique shop or charity chain.
Retail sales in the UK were unexpectedly strong in June, boosted by sales of secondhand goods at charity shops and antique dealers, although department stores continued to struggle.
The quantity of goods bought in June rose 1% from May, according to the Office for National Statistics. City economists had forecast a 0.3% drop in sales, following May’s 0.6% fall. The figures boosted the pound by half a cent to $1.2480.
The Office for Budget Responsibility’s Brexit analysis certainly paint a worrying picture of life in Britain after a no-deal exit from the EU.
Even though it uses the least severe of the IMF’s two no-deal Brexit forecasts, the OBR assumes:
Issues for the Government’s response…
Labour MP Chris Leslie is also concerned:
Today’s @obr report on the dangers of a no-deal, no-transition #Brexit should be a massive wake up call to anyone thinking this would be just another political event.
If you doubt this is a cliff edge, these negative statistics paint a pretty stark picture… #obrfiscalrisks pic.twitter.com/XufKboOhHJ
No-deal means £30billion pa black hole from next year+ as tax revenues fall, threatening vital public services. And 12% of GDP onto national debt by 2023. @OBR_UK add: “There is no war-chest or pot of money set aside” and this is a “relatively benign” scenario “compared to some”!
John McDonnell, Labour’s shadow chancellor has seized on the OBR’s warnings, urging fellow MPs to vote against a no-deal Brexit today.
“It’s obvious the Conservative Party constitutes a clear and present danger to the economy and the wellbeing of everyone in the UK.
“We know that a No Deal Brexit would devastate the UK economy and the public finances, and it comes on top of the failed economic approach for the last nine years.
The OBR’s report has been published as many firms grapple with the threat of no-deal Brexit chaos.
Clare Francis, head of Brexit advisory at law firm Pinsent Masons, says firms face ‘shock waves’ from a disorderly Brexit.
“The OBR report brings the negative impact of a no-deal Brexit into sharp focus. For many this will send shockwaves through their business as they attempt to prepare for the very real possibility of a no-deal Brexit at the end of October.
“For Industries that are exposed to a seasonal flow of goods, such as food and retail, a winter time EU exit creates a more extreme economic risk compared to the original spring time date. This means that those businesses exposed to seasonal fluctuations must step up plans to hedge against a no-deal Brexit. Streamlining supply chains, switching to UK suppliers and realigning the workforce could all bolster the foundations of businesses grappling with Brexit risk.”
Here’s a clip of Philip Hammond warning against a no-deal Brexit:
The @OBR_UK says candidates are making “expensive” pledges and suggests they may be unaffordable in event of No Deal in October. Johnson would cut income tax by £9 bn, Hunt would hike defence spending by £15 bn. OBR calculates cost of “benign” No Deal is £30 bn/ year. pic.twitter.com/62zO04lk10
Philip Hammond, UK chancellor (for a few more days, anyway) has weighed in — saying that a no-deal Brexit could be even more severe than the OBR has suggested.
He told Sky News:
The report that the OBR have published this morning shows that even in the most benign version of a no-deal exit there would be a very significant hit to the UK economy, a very significant reduction in tax revenues and a big increase in our national debt – a recession caused by a no-deal Brexit.
But that most benign version is not the version that is being talked about by prominent Brexiters. They are talking about a much harder version, which would cause much more disruption to our economy. And the OBR is clear that in that less benign version of no-deal the hit would be much greater, the impact would be much harder, the recession would be bigger.
Hammond says OBR forecast understates how bad a Boris Johnson no-deal Brexit could be – https://t.co/2SHwAM3OeW
The OBR has also cautioned Boris Johnson and Jeremy Hunt against making extravagant pledges — warning that there’s no money for a ‘free lunch’.
Today’s fiscal risks report says:
It must be understood that additional tax cuts or spending increases would push government borrowing and debt up from the levels expected in our forecasts and that there is no war-chest or pot of money set aside that would make them a free lunch.
The Government does have room for manoeuvre against its ‘fiscal mandate’ for structural borrowing next year, but that does not provide an anchor for medium term tax and spending decisions.
The OBR are now taking questions from journalists at the fiscal risks press conference.
Unfortunately they’ve turned the live feed off. Fortunately the BBC’s Faisal Islam is tweeting.
OBR’s Robert Chote tells me that this stress test is not a worst case scenario, and it isn’t even the IMF’s worst case scenario.
Chote – The Chancellor’s £90bn a year number on the hit to public finances is a longer run assessment… the £80bn a year benefit referred to by JAcob Rees Mogg “is a view at one end of the spectrum”
OBR also assumes a package of fiscal support from the Government after a No Deal of £10bn a year to tariff affected businesses in agriculture and manufacturing and non-tariff barrier affected service sector
Worth underlining a couple of things about @OBR_UK report. 1. no deal scenario was actually put together by IMF earlier this yr. OBR simply extrapolating fiscal impact. 2. this is hardly the most pessimistic no deal scenario. IMF had a more pessimistic option OBR has ignored
In conclusion, Robert Chote says that many of the shocks, pressures and risks “taken on by choice” by the EU referendum are largely the same as two years ago.
However, he warns that recent developments make no-deal a larger threat, warning:
Brexit risks feel more prominent than two years ago, with no deal being countenanced at the highest levels, amid considerable uncertainty about what that would mean in practice.
Robert Chote adds that a no-deal Brexit would drive up inflation, due to new tariffs and the plunging pound
But the OBR predicts that the Bank of England could choose to cut interest rates, tolerating higher prices in the shops, to prop up the economy and bring output back to its potential.
Robert Chote says the OBR’s economics have crunched the fiscal impact of a no-deal Brexit, and concluded that it would push the UK economy into recession.
The big picture is that heightened uncertainty and declining confidence deter investment, higher trade barriers with the EU weigh on domestic and foreign demand, while the pound and other asset prices fall sharply.
These factors combine to push the economy into recession.
The OBR has also looked at the risk that climate change poses to the UK’s finances.
OBR chief Robert Chote tells the press conference that the scale of the risks depends hugely on the extent to which global temperatures rise (fair enough!).
But if global mitigation fails, and temperature rises are more significant, the risks could be greater and harder to assess.
This would make mass international migration and induced period of conflict more likely.
OBR chief Robert Chote is now outlining a list of spending risks that could threaten the UK.
Medium term risks include: austerity fatigue, health spending and welfare reforms.
Our economics editor Larry Elliott has swiftly analysed the OBR’s Brexit forecasts, and reports:
A no-deal Brexit would plunge Britain into a recession that would shrink the economy by two per cent by the end of next year, according to the Government’s independent forecasting body.
The Office for Budget Responsibility said increased uncertainty and falling confidence would deter investment and hit trade.
OBR chief Robert Chote says that the UK economy may have shrunk in the last quarter, partly because of Brexit stockpiling earlier in 2019.
This dragged activity forwards into January-March, as firms tried to hoard raw materials, parts, and finished goods in case of disruption at the ports.
The OBR’s fiscal risks report is out, and as predicted it warns that Britain would be dragged into recession after a no-deal Brexit.
Worryingly, Britain’s fiscal watchdog says that weak business surveys from June suggest that Britain may already be entering a “full-blown recession”.
Surveys were particularly weak in June, suggesting that the pace of growth is likely to remain weak. This raises the risk that the economy may be entering a full-blown recession.
The fiscal risks posed by recessions depend on their depth and persistence, the sectors most deeply affected, and the pace at which the economy subsequently recovers
The Office for Budget Responsibility will release its Fiscal risks report 2019 in a few minutes, followed by a press conference which will be streamed here:
Some relief for UK holidaymakers heading abroad this summer – the pound is rising this morning.
“The pound has come under intense selling pressure since Prime Minister May withdrew from her party leadership position, leaving markets with increased concern that the UK may be heading towards a harder Brexit.
Should this scenario materialise, pound-dollar could fall into the $1.00-$1.10 range.”
Conservative MP Rishi Sunak, a Boris Johnson supporter, thinks we should be sceptical about the OBR’s Brexit warnings:
Rishi Sunak @skynews on possibility of OBR predicting recession says “I do think we need to look at some of these forecasts with a pinch of salt”.
Says jobs/investment are booming despite “doom and gloom” predictions during the referendum
Here’s some reaction to the OBR’s no-deal Brexit warning (even though it’s not been published yet).
Neil Foster of the GMB Union hopes it will concentrate minds in Westminster:
No MP with any insight into the dark misery a recession causes should allow no deal. It’s sudden unemployment, debt, house repossessions, mental & physical ill-health & risk of family breakdown. Back in 2016 people wanted things to get better not worse. MPs must rule out no deal. https://t.co/vYustCucEH
Let’s not forget this 3% slump is the estimated additional damage of No Deal. In total the Treasury estimates an economic hit of 8% when compared to staying in the EU. Another lost decade. pic.twitter.com/1nTtWFGB5L
Today’s OBR fiscal risks report will also analyse possible risks to the public finances from climate change.
This may tackle the “tragedy of the horizon” – basically, once climate change becomes a defining issue for financial stability, it may already be too late [Bank of England governor Mark Carney gave a good speech on this recently]
Foreign secretary Jeremy Hunt is discussing Brexit on Radio 4’s Today Programme now, and admitted that No-Dealt could be a ‘short-term’ economic shock
I don’t think anyone should minimise the fact there will be economic consequences to no deal. but we should also recognise that we are a democracy.
We must do what we are committed to do in the referendum,
Even with the shock of a no-deal Brexit, over time we could make it work and we could flourish and prosper and we could indeed become richer as a country.
[But] I wouldn’t minimise the fact there could be a short-term shock.
We would have European neighbours that had deliberately chosen to make the UK poorer, and that would change and harden British attitudes to Europe for a generation.
That’s not something that wiser heads in Europe actually want.
The OBR’s no-deal Brexit analysis will be based on work released by the International Monetary Fund in April.
The IMF outlined a scenario under which there was no border disruption after a no-deal Brexit, but some new trade barriers were created by customs and regulatory border controls.
Good morning, and welcome to our rolling coverage of the world economy, the financial crisis, the eurozone and business.
Britain will slip into recession next year and the economy will be 3 per cent smaller if there is a no-deal Brexit, the UK’s official economic forecaster is expected to say today.
The Office for Budget Responsibility is due to give its first assessment of the economic impact of a no-deal Brexit, including how it may affect household incomes, wages, employment and house prices.
Boris Johnson referencing kipper trade from the Isle of Man.
Worth noting the Isle of Man isn’t part of the EU or the UK, but remains part of the customs territory of the Union. pic.twitter.com/GI7hOCW8iu
Group says cryptocurrencies may destabilise global economy without regulations
Policymakers cite ‘persistently uncertain environment’ for decision
Since the crisis, financing has become much more costly
New Inequality Data Is a Gift to Campaign Sloganeers
The Fed developed a data set that throws wealth disparities into high relief.
Bloomberg, July 16, 2019
Studying wealth and income inequality has long been the stomping grounds of economists with the time and willingness to dig into 19th-century tax ledgers, Gilded-Age stock ownership and pre-Great Depression bank holdings.
For the do-it-yourselfers the entire exercise just became a lot easier, with the release by the Federal Reserve of a vast run of information on U.S. wealth distribution. It has something for everyone, making it simple to cherry pick your favorite data point and support your philosophical views on just about anything — taxes, wealth and inequality
Why does this matter? At a time when inequality may be given more attention in the run-up to the 2020 election, it’s not hard to imagine how this raw material might be fashioned into campaign slogans. There’s plenty of fodder here for the likes of everyone from Representative Alexandria Ocasio-Cortez to Treasury Secretary Steve Mnuchin.
Let’s look at a few possibilities:
America is richer than ever: This is one for the incumbent to tout. Americans have never been wealthier: Household assets are at an all-time high, with a total value of $117.6 trillion. Total net worth (assets minus liabilities) is $102.5 trillion. Liabilities, primarily home mortgages ($9.7 trillion, or 70%) and consumer credit ($3.6 trillion, or 26%) make up most of the $15.1 trillion of total liabilities.
Relative to these assets, or to discretionary income, debt levels at present are very manageable. They are substantially lower than they were before the financial crisis — in fact, household debt-service and financial-obligation ratios are the lowest since this data series began 30-years ago. In other words, American households are both richer and carry lower debt burdens, lowering a huge source of both economic and psychological stress.
America is for the rich: An issue for the challengers. Yes, America is wealthier than ever, especially if you are in the top 10% of households. The Fed found that the top 1% of American households held wealth of $32.5 trillion. That works out to be an average household asset value of about $25 million each. The rest of the top 10% (90th to 99th wealth percentiles) held total wealth of $42.8 trillion. Add the top 1% to this group and we get a total of $75.3 trillion, with an average household wealth of $5.8 million. To be sure, this is an average and is skewed by the enormous wealth of those at the very top; the median, or midpoint, would be lower.
The next 40% (50th to 90th percentiles) has total assets of $35.3 trillion. The 63.8 million households in the top half of America have average household total wealth of $1.72 million apiece. Note this does not include liabilities such as mortgages, student loans, consumer credit, which offsets some of this.
Where things get interesting is when we look at the bottom 50% of households in America by wealth. They own total assets of $6.86 trillion. That reflects wealth (before liabilities) of a mere $107,523 per household.
Let’s dig a bit deeper: The top decile of America holds almost about 70% of the national wealth — 31% is held by the top 1%, while the rest of the top 10% holds about 39%.
And the bottom half’s share? About 1.3%.
Although the wealthy own most of the assets, the less well-off hold a disproportionate share of the liabilities. The top 10% have a relatively modest amount of debt ($633 billion for the top 1%, and the rest of the top 10% has $2.8 trillion). Meanwhile, the bottom 50% has $5.6 trillion in liabilities; the group between the top decile and the bottom half has more than $6 trillion in liabilities. In other words, the bottom 90% has total liabilities of almost $12 trillion.
The conclusion here is that the wealthy own most of the assets, while the less wealthy are stuck with most of the liabilities. Construct the cleverest campaign slogan out of this and you just might become the Democratic nominee for president.
Supply-side economics doesn’t make everyone richer: There’s probably something for incumbents and challengers here, and it might also help settle a debate that has preoccupied economic wonks for years. We can now show data for the three decades following the adoption of Reaganomics, aka supply-side economics; that reducing the tax burden on the wealthy would lead to a burst of economic growth that would make everyone richer, and that wealth would trickle down from the top. The new data make it clear that the opposite has happened, and wealth inequality and income inequality have each increased.
This data helps us see that supply-side economics was always about shifting wealth from the low and middle ends of the wealth distribution toward the top. In other words, much of our wealth inequality is by design, the result of public policies. Whether this was done out of good faith or bad is up to you to decide.
The conclusion of all this giant data dump: We shouldn’t be surprised if economic inequality plays an ever-more prominent role than it has in past presidential election cycles. We all owe a small debt of gratitude to the researchers are the Fed who pulled this data together and made it just a little easier to understand the full extent of the vast disparities in wealth and income in modern America.
The Trump administration may try to force the dollar down, but probably without success
Programming Note: Starting next week, Ritholtz’s Reads will have a new home. To receive early morning train reads every day in your inbox, please sign up here.
My morning train reads:
• Thank God it’s Thursday: the four-day workweek some want to bring to the U.S. (Washington Post)
• This legendary Vanguard fund manager had the right stuff to beat the market (Marketwatch)
• One of the oldest investing theories on Wall Street has yet to confirm this year’s rally is for real (CNBC)
• Booming Demand for CBD Is Making Hemp the Cannabis Cash Crop (Bloomberg Businessweek)
• The Agony of Hope Postponed, by a Value Investor (Wall Street Journal)
• 10 Things You Need To Know About Automation And The Future Of Work (Basis Point)
• The Economic Opportunity Washington Is Missing Right Now, According to Goldman Sachs’ Abby Joseph Cohen (Barron’s)
• FaceApp’s viral success proves we will never take our digital privacy seriously (CNN) but see FaceApp went viral with age-defying photos. Now Democratic leaders are warning campaigns to delete the Russian-created app ‘immediately’ (Washington Post)
• Notre-Dame came far closer to collapsing than people knew. This is how it was saved. (New York Times)
• Meet Jeron Smith, the Man in Charge of Building Stephen Curry’s Media Empire (Sports Illustrated)
What are you reading? Tell me here with #Reads.
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