Economy fell by close to 20% in Q2

As the final official Brexit negotiations conclude, there is concern over several areas of the UK economy that could be dealt significant blows in their ability to do tariff-free business with the EU from January 1st.

The auto trade remains the largest overall exporter. There are rumours circulating that the import of parts from non-EU countries like Japan and Turkey may see vehicles attract tariffs.

There are two other significant areas that are concerned about what deal will finally be proposed in which they could be sacrificed.

The pharmaceutical industry believes that the Government has not done enough to secure its competitive position with Brussels while there is a perennial concern from the fishing industry that it could face competition from French trawlers within UK waters.

Although it is a relatively minor part of the overall economy, fishing rights have always been a symbol of UK independence with several skirmishes over the years.

Andrew Haldane, the Bank of England’s Chief Economist has been bucking the trend of opinion of several of his MPC colleagues and continued the trend yesterday.

He was heavily critical of what he called chicken licken economics in reference to a fable about a chicken who believes the world is coming to an end because an acorn falls on its head.

Haldane has been more upbeat than his colleagues recently and commented yesterday that although it is prudent to prepare for the worst, there is no reason not to hope for the best.

The UK economy contracted by a record 19.8% in Q2 according to the final cut of data published yesterday. As we enter Q4, there will be continuing speculation about the first cut of Q3 GDP which according to BoE Governor Andrew Bailey will leave the economy around 10% lower than before the start of the Pandemic.

While confusion continues to reign over regional lockdowns and several anomalies, the Prime Minister, in a press briefing held yesterday, said he would not hesitate to put the country back into total lockdown if the infection rate fails to be brought under control.

Yesterday, the pound rallied as optimism over a Brexit trade deal grew. It reached 1.2942, closing at 1.2921.

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Trump and virus point to more protectionism

As both sides in the Presidential race declare victory following Tuesday’s debate, there is an underlying yet growing feeling that the globalization of the world economy may be coming to an end.

President Trump, if re-elected, has determined that he will start the ball rolling to end U.S. reliance on China, its goods, and its funding.

That would be an extremely hazardous path to follow since following the pandemic, China stands head and shoulders above any other nation as a buyer of U.S. Government debt.

There is a truism that as the U.S. issues debt to fund its trade deficit which runs at around $60 billion a month, a fair proportion of which is with China. Beijing basically lends the U.S. money to buy its goods.

It is obviously way more complicated than that but a sliding scale where domestic production takes borrowing away from the Government and into growing industrial production in the private sector would be the goal.

This entire process could be accelerated by the Pandemic and Chinese involvement in its creation. Once the fears of further spread and a vaccine is available, fingers are bound to be pointed again and the world may want to curb what is seen as growing Chinese hegemony.

There is a sense of fatalism growing that the lack of a support Bill is going to slow the recovery from the Q2 contraction and nothing further will be done until after the election, particularly in the aftermath of what is being labelled the most contentious Presidential debate in history. In fact, the term debate should be removed and replaced by slanging-match.

The dollar index traded in a narrow range and closed virtually unchanged on the day at 93.84. It again tested the support at 93.80 but managed to close above that level and appears to be creating something of a base.

Rates to stay lower longer no matter the inflation outlook

Globalization appears to be a theme of Central Bank operations with the ECB looking at following the Fed into changing how it views inflation and a fixed target.

Over the past few decades, G7 Central banks have had very similar policy goals but how they are affected, and the tactics used have varied. The U.S. has been controlled by employment, the EU by inflation and the UK by trade. Each however is charged with creating stable growth with low inflation targeted at 2%.

Following the appearance of Quantitative Easing as a legitimate policy tool, inflation has been abandoned as a concern as prices have fallen along with interest rates with oil being the most significant contributor.

Fed Chairman Jerome Powell announced recently that the U.S. Central Bank may allow inflation to overshoot its target considerably as and when price rises begin. Yesterday ECB President Christine Lagarde hinted at something similar.

She commented in a speech that in the current environment of lower inflation, the concerns we face are different and this needs to be reflected in our inflation aim.

In the past the influence of Germany on the ECB despite there never having been a German President of the Central Bank has led to rising inflation, the bete noire of German politics and its economy, to be strictly controlled.

That may change going forward as the similarity of the obstacles facing both the EU and U.S. becomes clear and their policies coincide.

They seem to be treating their currencies with benign neglect as a both an influence on inflation and a tool to control it. The U.S. Treasury appears to have abandoned charges of currency manipulation which were even pointed at Brussels quite recently while Lagarde was recently sanguine about the level of the currency.

Yesterday, the single currency rose to a high of 1.1755, closing at 1.1720. It appears to be creating strong resistance between 1.1740 and 1.1760 with three daily highs in that band including so far this morning.