British politics has perked up – to say the least. It’s just over a fortnight since the dramatic local and European elections in which Ukip surged. Now we’ve seen a riveting Newark contest, featuring a Tory fight back.
With all this, plus open warfare in the cabinet and the Queen’s Speech, complete with fainting pageboy, the Westminster village has been on overdrive. Domestic politics has dominated the airwaves over the last week – and that’s great. Clearly an econo-nerd, I’m a political junkie too.
It strikes me, though, that almost all the political analysis we hear takes it as given that the UK economy is fast-improving and, as the May 2015 general election approaches, will get better still. That may, indeed, happen and I certainly hope it does. Yet, away from high-octane TV psephology, economic news has emerged since last weekend, particularly from abroad, which could ultimately mean all political bets are off.
George Osborne is in “I told you so” mode. Much to the Chancellor’s satisfaction, the International Monetary Fund has just upgraded its UK growth forecast for 2014 to 2.9pc – suggesting Britain will this year grow faster than any other G7 economy.
Just twelve months ago, with the UK in danger of triple-dip recession, the IMF reprimanded Osborne for “playing with fire”, urging him to abandon attempts to consolidate Britain’s public finances and speed up government spending instead.
The European Central Bank took no decisive action last Thursday either to lower Eurozone interest rates or launch its own programme of “quantitative easing”. It was made clear, though, that the ECB may soon follow the US Federal Reserve and Bank of England by firing up Frankfurt’s virtual printing press and creating, ex nihilo, hundreds of billions of euros.
The council was “unanimous”, said ECB boss Mario Draghi, a hint of steel entering his voice, in its commitment to “unconventional instruments”. In case that wasn’t crystal, he spelt it out. “All instruments within our mandate are part of this statement,” he told the world. “There was, in fact, during the discussion we had today, a discussion of QE”.
This column was going to be about emerging markets – and the potential impact on the UK of the recent slowdown in the generally resurgent economies of the East. It was going to be relatively upbeat, not least because I’m an emerging markets enthusiast and think it’s wrong to confuse a blip for a trend.
Yes, stock markets and currencies are suffering in the likes of India and China, largely due to Federal Reserve “tapering” – the reining in, by America’s central bank, of its $85bn-a-month money-printing habit. Last month, as the Fed’s funny-money machine slowed marginally, exchange traded funds focused on shares and bonds from developing nations endured withdrawals of $7bn – a January record. The MSCI EM index of leading emerging market shares shed a painful 9pc, compared to a 1.6pc drop in the S&P500, the bellwether index for Western stocks.
The Eurozone has recently been off our news radar. We Brits have become smug of late given our new-found growth, now that we’re the most rapidly expanding economy in the Western world (almost).
We certainly have a sense (oh joy!) that the “continental” economies aren’t doing as well as ours. Apart from those pesky Germans, of course, who are annoyingly good at making stuff the rest of the world wants to buy.
Yet, the euro as a tinder-box, which at any minute could spark financial meltdown – that fear seems to have gone. The euro as a ticking-time bomb, about to explode, causing another Lehman-style Minsky moment on global markets – surely, all that has been dealt with, sorted, solved?
The European Central Bank has acted. Across the 17-nation Eurozone, the benchmark re-financing rate was slashed on Thursday, from 0.5pc to a record low of 0.25pc. In Greece, Spain and other economically-fragile Eurozone members, where inflation is worryingly low, many welcomed the ECB’s action. In Germany, with its historic inflation aversion, Teutonic eyebrows were raised.
What’s beyond debate is that this latest ECB move is the prelude to a renewed round of money-printing. While America’s quantitative easing is meant to be “tapering soon”, in Western Europe the funny-money dials have just been turned up.
“The euro is no longer under existential threat,” said Herman Van Rompuy three weeks ago. “Financial stability has been restored”. Van Rompuy, if you can’t place the name, is President of the European Union. That makes him the most senior policy-maker in Brussels, wielding considerable power over the governments of 28 countries with a combined population exceeding 500m people.
Despite this reality, Van Rompuy has a near-zero public profile. He’s probably best known, not only in the UK but across much of Western Europe, for being the man that UKIP leader Nigel Farage once described as having “the charisma of a damp rag and the appearance of a low-grade bank clerk”.
The Japanese economy is supposed to be recovering. Just a couple of weeks ago, official data indicated an expansion of 0.9pc during the first three months of this year. That placed the third-largest economy on earth among the developed world’s top-performers.
Here in the UK, our GDP increased by just 0.3pc during the first quarter of 2013, while the United States registered 0.6pc growth. The Eurozone, meanwhile, remained stuck in reverse gear, its economy contracting 0.2pc over the same period.
The Eurozone economy has contracted every single quarter since the end of 2011. During the first three months of 2013, the region’s GDP shrank by a punishing 0.6pc, having fallen at a similar pace the quarter before.
Responding to this prolonged slump, the European Central Bank on Thursday cut interest rates. Having last shifted 10 months ago, the ECB lowered its main rate by a quarter point to 0.5pc, while signalling it is prepared to go even further. “We remain ready to act if needed,” said ECB President Mario Draghi.
“This sucker could go down”. So said George W. Bush back in 2008, at the height of the global financial storm. The then US President was referring to the massive risks facing the world’s largest economy following the Lehman collapse. Could Dubya’s prosaic words now be applied to the euro? Will Cyprus quit the single currency?
The “bail-in” deal imposed on this tiny Mediterranean nation last week is better than the one mooted less than a fortnight ago. The lunacy of penalizing insured deposits, those under €100,000, has been avoided. While the atmosphere in Cyprus is tense, it is also obviously a relief that, since the banks re-opened their doors last Thursday, after almost a fortnight shut, there’s been no serious civil unrest.