This week marks the start of the media “silly season”. It’s during the dog days of August, when so many of us are away on holiday, that the economic and political agenda tends to slow and newspapers and broadcasters become desperate for anything of interest to report.
With Parliament in recess, and business leaders at the beach, this is the time of year when grown-up journalism takes a back seat, making way for offbeat, bizarre news stories, the weirder the better, anything that will make a splash.
August 2014 won’t be like that. Its strikes me that this year the silly season is cancelled. We’re in for a singularly un-relaxed high summer on the news-front instead, an August of urgent headlines, political intrigue and financial angst.
For a start, global equity markets are on a knife-edge. Throughout 2014, Western share indices, fuelled by central bank “funny money”, have ratcheted up and up. Stock valuations are now historically high, despite weak corporate earnings and the failure of the large Western economies to stage a convincing recovery.
In recent weeks, as America’s Federal Reserve has continued to “taper”, with quantitative easing due to end completely in October, nerves have become frayed. Last Thursday, the US S&P 500, the world’s most influential stock index, endured its worst drop since April. This happened despite the publication, on the same day, of far better US growth figures, showing America’s economy expanding by a buoyant 4pc during the second quarter of this year.
Mainstream investors are now beholden to an absurd “good news is bad news” mantra. Any evidence of economic recovery causes markets to plunge, given the increased likelihood the Fed and its political masters, presented with stronger economic data, will finally end five years of QE and begin hiking interest rates from today’s ultra-low levels sooner than they otherwise would.
Such counter-intuitive trading reveals just how much fickle central banks, rather than solid economic fundamentals, are now supporting Western stocks. As recently as early July, London’s FTSE-100 was 10pc up over the previous twelve months. On Friday, after several days of intense volatility, amid much speculation about when Fed-QE will end, those 12-month gains on UK shares were reduced precisely to zero.
Across the large emerging markets, meanwhile, a QE-induced bond bubble shows ominous signs of popping. With such countries now accounting for half the global economy, and much more indebted than at the time of the 2008 Lehman collapse, an implosion could produce shockwaves that are felt across the world. Far from providing support, as they did during the last systemic financial crisis, the emerging markets could now act as a market millstone. So, between shaky Western shares and bloated Eastern bonds, we’re in for a volatile summer.
Into this news mix we must include the alarming levels of geo-political risk currently stalking the world, which show little sign of abating for the Northern Hemisphere’s holiday season. Tragic events in Gaza escalate, with neither side willing to back down. Across Eastern Ukraine and Iraq, too, the bombs keep flying, the recriminations and diplomatic finger-pointing in their wake.
Dodgy financial markets, made shakier by on-going war-mongering, will no doubt significantly impact the UK’s political agenda too over the coming month. This would have be an extremely busy British political summer, though, even if financial markets were stable and the Middle East and Ukraine were calm.
Just six weeks from today, the Scottish independence referendum will be upon us. While a “No” vote is forecast, keeping the UK thankfully in tact, it could yet be close – ensuring a babble of spin and counter-spin will fill our airwaves as Scotland’s day of destiny approaches.
Then, just two weeks later, we’ll be in the throes of the Conservative party conference, the last before the May 2015 general election. There, that perennial Tory issue of Europe is likely to loom large. One reason, of course, is that Ukip won the European elections in May, taking 28pc of the vote and more than tripling its tally of local council seats. The other is that David Cameron has promised, if he remains Prime Minister, to negotiate the terms of the UK’s European Union membership and then offer the British people a referendum.
This autumn, once the Scottish vote is over, the debate over Britain’s place in Europe is set to reach fever pitch. That’s why Boris Johnson will this week engage in some extremely careful positioning, with Tory politicking on Europe no doubt continuing throughout the summer, as conference season approaches.
On Wednesday, the Mayor of London, clearly a plausible candidate for his party’s leadership, will make a speech to mark the publication of a detailed economic report arguing that leaving the European Union is “definitely a viable option” for the UK.
Authored by Dr. Gerard Lyons, the Mayor’s Chief Economic Advisor, the report will argue that London’s £350bn economy, accounting for over 21pc of the UK’s GDP, would do best over the coming decades if the Britain stayed within a significantly reformed EU, while adopting outward-looking trade policies that better connect us to the fast-growing emerging markets. Under that scenario, the capital’s economy expands to £640bn by 2034 in today’s prices, according to forecasts by Volterra, an independent economic consultancy.
The more eye-catching conclusion, though, is that leaving the EU, but still pursuing our own more activist trade-promotion policies, would still see the London economy expand to £615bn over the next 20 years, only slightly less than under the “staying in a reformed EU scenario”. This report, then, is designed to increase pressure on Cameron to conduct, if it comes to it, a meaningful and hard-nosed negotiation over the UK’s EU membership, insisting that Britain doesn’t necessarily need to stay in.
Equally interesting is the conclusion that staying in an unreformed EU would result in London’s growing to just £495bn by 2034, far less than if Europe was reformed and forced to adopt more business- and trade-friendly policies. So the UK has little to lose from leaving Europe, the Mayor will infer, but much to gain if it secures meaningful changes and then votes to stay in. Tough negotiation with Europe will secure a big prize, Mr. Johnson will effectively be arguing, putting Cameron very much on the spot.
The heart of the Mayor’s speech on Wednesday is likely to concern the eight-point EU reform plan, which he believes should act as a basis for the UK’s negotiation. While I’m not privy to the details of this plan, Dr. Lyons has made clear “the EU’s policies towards the City of London form an important part of the reforms we’d like to see”. This is hardly surprising given that incoming European Commission President Jean-Claude Juncker is now keen to create a new financial services directorate, which could skew the EU’s financial policy away from the City of London and towards the eurozone.
As for the other points, I suspect the Mayor will look to stifle the EU’s constitutional aim of “ever closer union”, while also limiting the “free movement of labour”. There could be an insistence on capping the EU’s budget in real terms and perhaps a forced reduction in the number of Brussels “eurocrats”. Maybe Johnson will also want guarantees on EU members who aren’t in the single currency staying out of Europe’s banking union, reducing the danger of the UK being on the hook financial during any upcoming Eurozone bail-out. Whatever he says, the Mayor’s speech should mark the start of a serious debate on precisely what Britain wants from Europe. And it’s about time too.
Follow Liam on Twitter @liamhalligan