Photograph: Bloomberg/Bloomberg via Getty Images
Germany has responded to the earlier comments from ECB president Mario Draghi.
Draghi was countering an attack from German finance minister Wolfgang Schäuble who said record low rates were causing “extraordinary problems” for German banks and pensioners .
Draghi defended the ECB’s policies and said, “We obey the law, not the politicians, because we are independent as stated by the law.”
In turn German chancellor Angela Merkel said it was legitimate for Germans to discuss how far interest rates had fallen but “that shouldn’t be confused with interference in the independent policy of the ECB, which I support.”
“The ECB is is independent in its policies,” she told reporters while on a visit to the Netherlands, according to news agency Reuters.
On that note, it’s time to close for the evening. Thanks for all your comments, and we’ll be back tomorrow.
Legal and General Investment Management, which owns 2.9% of Anglo American, is one of the investors which voted against the company’s remuneration report. It said:
The rationale for this instruction centred on the lack of discretion exercised by the Remuneration Committee to scale back Long Term Incentive Awards (LTIP) to Executive Directors at a low share price. These grants are made as a multiple of salary and have the effect of awarding a higher number of shares which could lead to windfall gains in the future. This is not in line with best practice and is stated in our voting policy.
At the AGM, approximately 42% of investors opposed this item. We will continue to engage with the company giving constructive feedback on their remuneration structure ahead of the binding policy vote next year.
Here’s our report on the investor rebellion at Anglo American:
Mixed day for European markets
With the recent gains on markets it was probably no surprise that investors have decided to pause for some reflection. The European Central Bank meeting with no change to policy but promises of further action if necessary was seen as a little inconclusive for market sentiment, while in the UK, retail sales and public borrowing figures both disappointed. Analyst Tony Cross at Trustnet Direct said:
After the recent run of gains for equities, it was probably time for the markets to pause for breath and that certainly appears to have come about during today’s session. Oil prices are edging back a little, but more significantly for London stocks was the news that UK retail sales came in far lower than had been forecast. This seems to have set the pace for the morning session and the fact that Mario Draghi appeared to lack any urgency in his statement meant there was little left for markets to cheer, although we have seen some signs of bargain hunting in the last few minutes of trade.
The final scores showed:
- The FTSE 100 fell 28.82 points or 0.45% to 6381.44
- Germany’s Dax edged up 0.14% to 10,435.73
- France’s Cac closed 0.2% lower at 4582.83
- Italy’s FTSE MIB finished up 0.4% at 18,732.96
- Spain’s Ibex ended up 0.55% at 9197.2
- In Greece, the Athens market added 2.78% to 598.72 on hopes of a deal between the country and its creditors as the Eurogroup meets on Friday
On Wall Street, the Dow Jones Industrial Average is currently down 58 points or 0.3%.
In his opening remarks to Anglo American’s annual meeting - just released by the company - chairman Sir John Parker has defended its pay policies:
We are of course well aware of the strength of feeling among some investors about the levels of executive remuneration in many large companies and the mechanisms that determine them. As you know, we undertook extensive revisions to our remuneration policy in 2013 following consultations by the chair of our Remuneration Committee, Sir Philip Hampton, with our major shareholders, and that policy was overwhelmingly approved at our AGM in 2014. It is that policy that we are working to today.
Volatile commodity markets and their effect on companies such as ours of course create a variety of remuneration outcomes. That is what our remuneration structures are designed for - to ensure appropriate alignment with shareholder interests, while also incentivising management through a balance between stretching management and making targets realistically achievable.
There has to be a mixture of measures focused on financial and relative market performance as well as non-financial metrics for other critical work that drives longer-term strategic success. I believe that our remuneration policy does strike that balance. However, as is the case every three years, we will be taking a fresh look at the policy during the next 12 months in order to put it to a fresh round of consultation with shareholders, followed by a vote at next year’s AGM.
In the case of the remuneration outcomes for 2015 - without doubt a very tough year for us and for our shareholders - I would point out that our existing policy did result in the Chief Executive’s variable pay being just one-fifth of the maximum achievable. In addition, his salary was frozen, as it was for all senior management.
Anglo American plans to launch a review of executive pay, Reuters is reporting, after the revolt against the £3.4m pay packet awarded to chief executive Mark Cutifani.
The exact numbers show 41.64% of shareholders who submitted votes ahead of the annual meeting opposed the remuneration report.
Last year 94% voted in favour of the report.
The vote is, as usual, non-binding but will prove severely embarrassing for the company.
Anglo says the full voting result will be released on Friday. Of those shareholders who submitted votes ahead of the annual meeting, 41% were opposed to the remuneration report with 58% in favour.
Earlier investment group Hermes said it would not back the pay report. Director Bruce Duguid said:
We are concerned by the unusually high number of shares issued to directors under its long term incentive plan. This is roughly triple the number of prior years, as it is calculated by dividing the salary of each director by the prevailing share price, which was particularly low at the time of the award following a sharp fall over the year. In the light of the value creation experienced by long term owners in recent years, we are concerned about the resulting potential future reward to directors.
Anglo American investors rebel against director pay
Elsewhere, the new “shareholder spring” seems to be continuing.
After nearly 60% of investors voted against Bob Dudley’s pay package at BP, Reuters is reporting that Anglo American has said that partial voting results show that 41% of shareholders have voted against its remuneration report at the mining group’s annual meeting.
Chief executive Mark Cutifani is in line for a £3.4m pay deal.
Updated
Earlier, just as ECB president Mario Draghi was getting started, over in the US the Labor Department announced that the number of jobless claims fell unexpectedly last week.
Initial benefit claims dropped by 6,000 to a seasonally adjusted 247,000, the lowest reading since November 1973, compared to expectations of a rise to around 263,000.
Meanwhile oil is on the slide again. After early gains, a rebound in the value of the dollar has seen Brent crude fall 1.5% to $45.08 a barrel.
Back with the UK, and the Treasury has revealed the impact of falling oil prices on the North Sea sector. Scotland editor Severin Carrell reports:
The North Sea oil and gas sector raised only £35m last year following the collapse in global oil prices and further weakening the Treasury’s books, the latest HMRC data shows.
Provisional HMRC data for 2015/16 puts total petroleum revenue tax income at minus £503m – the first time PRT income has been negative for a full year, with operators able to deduct various allowances or a deductible expense for corporation tax and the supplementary charge. In 2008/09, the Treasury raised £2.8bn from PRT.
Offshore corporation tax income was also at its lowest in decades, at £538m compared to peaks of £9.8bn in 2008/09 and £8.8bn in 2011/12.
These figures, which exclude Treasury income from the supplementary charge or costs to the Treasury of other North Sea tax deductions or allowances for decommissioning or investment, suggest the sector’s days as a cash cow are now over. It also confirms challenging questions for Scotland in the ongoing debate over independence.
Eurozone consumer confidence edges up in April
Still with the eurozone, and consumer confidence rose slightly more than expected in April after three consecutive months of decline.
According to an initial estimate from the European Commission, it edged up 0.4 points to -9.3 compared to expectations of a figure of -9.5.
For the 28 member European Union, consumer sentiment increased by 0.5 points to -6.8.
Howard Archer at IHS Global Insight said:
A modicum of good news for Eurozone growth hopes as consumer confidence edged up in April having fallen over the previous three months to be at a 15-month low in March. The improvement was small, but at least it was a tiny step in the right direction.
Any sign that consumer confidence may be starting to turn around is to be welcomed as on the face of it, consumers perhaps offer the Eurozone the best hope for growth at the moment - the fundamentals still look reasonable for consumer spending in the Eurozone with deflation/negligible inflation boosting purchasing power and labour markets generally improved.
Commenting on the criticism of loose monetary policies from some quarters - notably Germany of course - economists at the Cebr said:
Cebr recognises that there are important risks associated with an over-reliance on loose monetary policy. Continuing to push on the string of monetary policy to boost the Eurozone’s flailing economy is not a sustainable way forward. The potential of monetary stimulus to restore inflation and growth is reaching its limits as more decisive measures such as ‘helicopter money’ are not yet on the ECB table. Moreover, the uncharted waters of “QE infinity” and negative rates could be hiding unintended negative consequences that no one can predict – the policies are after all called ‘unconventional’ for a reason. However, as Draghi pointed out in his press conference, the ECB is not alone in experimenting with these measures. On the contrary, the ECB has been late to the ‘QE party’ and in efforts to loosen policy more generally. Additionally, given its mandate to pursue price stability and contribute to the EU’s objective of balanced economic growth, the ECB cannot be blamed for loosening policy given the inadequate response when it comes to the other levers of economic management: fiscal policy and structural reforms.
Looking ahead, Cebr expects the economic recovery in the Eurozone to continue to develop at an anaemic pace. While the ECB’s stimulus measures will provide some relief for now, these policies will only work slowly in the absence of a supportive fiscal stance in those member states that can afford to do so within the Maastricht Treaty’s fiscal rules.
The ECB meeting was clearly dovish in tone, according to economist Carsten Brzeski at ING Bank:
Some ECB watchers today might regret that they did not enjoy one of the first sunny days of the year but stayed inside following a rather eventless, not to say dull, ECB press conference. As expected the ECB did not announce any new measures but sent a clear dovish signal, keeping the door open for additional easing in the future.
All in all, there are two key take-aways from today’s ECB meeting: first of all, the ECB is still on high alert and would be willing to implement even more stimulus if the recovery falters or low inflation leads to negative second round effects (even though it’s unclear what these measures would really be). And, secondly, the ECB does not look willing at all to alter its monetary policies as a result of German criticism. German [criticism] has become a fact of life but it will not change the ECB’s life.
Following Draghi’s performance, the ECB has issued more details of its corporate bond buying programme.
This will start in June and be carried out by six central banks, from Belgium, Germany, Spain, France, Italy and Finland.
Among the criteria for eligibility, the bonds must be denominated in euro, have a credit rating of at least BBB-, have a maturity of between six months and 30 years, be issued by a corporation established in the euro area but not be a credit institution. Debt from corporations in the euro area whose ultimate parent companies are based elsewhere are also eligible if it meets the other criteria.
Updated
Snap summary: Draghi faces down his critics
Mario Draghi has just administered a very firm rebuke to his critics in general, and German finance minister Wolfgang Schauble in particular.
Most crucially, the ECB president has warned that those who endanger ECB independence are actually making Europe’s economic problems worse.
He swept aside the notion that German savers are the victims in the current crisis, blaming the media for not explaining how low inflation is helping savers.
And he was adamant that the ECB will not be knocked off course, revealing that the governing council were unanimous in defending its independence today.
We have a mandate to pursue price stability for the whole of the euro zone not only for Germany.
We obey the law, not the politicians, because we are independent as stated by the law.”
That’s code for “Wolfgang, please don’t claim we are causing ‘enormous problems’, there’s a good chap”.
Draghi also tried to cool another discussion, about helicopter money, saying twice that it hadn’t been discussed.
That's all from Draghi. Very robust defence from critics. Expect questions about Helicopter money to intensify if inflation remains low
— Open Europe (@OpenEurope) April 21, 2016
Listen to this Germany. Draghi rightly says that German ECB-bashing can have negative impact on confidence, actually prolonging ECB policies
— Carsten Brzeski (@carstenbrzeski) April 21, 2016
And having left interest rates on hold today, Draghi’s message to the eurozone was effectively ‘trust us, it’s working’.
Our policies work, they are effective. Just give them time to fully display their effects.”
What I expected from #Draghi: combativeness
— Maxime Sbaihi (@MxSba) April 21, 2016
What I got from #Draghi: patience
Draghi: Don't want to speculate about Brexit
And finally, Draghi gets the Brexit question.
Q: Is the ECB worried that the UK’s referendum over European Union membership will hurt the recovery?
The discussion about Brexit has already had some significant consequences on markets, Draghi replies, such as the decline in the value of sterling.
#Draghi says ECB expects continued volatility pre-#Brexit referendum. Risks to Eurozone recovery "limited".
— Geoffrey Smith (@Geoffreytsmith) April 21, 2016
He won’t speculate about the outcome of the vote on June 23, but says that ECB staff think there is only a “limited” risk that it might endanger the eurozone recovery.
Updated
Q: Are you worried that companies will stop investing because of the flow of criticism from Germany?
A polite, lively debate may even be welcome, to help shape our policies, says Draghi.
But criticisms of a certain type could be seen as endangering the independence of the ECB. Therefore, that can cause delays in investment, delays in taking risks.
But we are independent, so we will continue with our policies. But the recovery will take longer if our independence is endangered, he concludes.
Draghi on Germany: "criticisms of a certain type could be seen as endangering the independence of the ECB" and put companies off investing
— James Mackintosh (@jmackin2) April 21, 2016
Updated
Q: How are relations with Wolfgang Schauble, and do you accept his claim that the ECB has fuelled support for extremist parties in Germany?
My discussions with Schauble have been very positive, fruitful.... and “I would say quiet, and very friendly” Draghi replies.
And he rejects the claim that a non-Italian would be acting differently. His predecessor, Jean-Claude Trichet, recently said he would have taken exactly the same steps.
#Draghi addresses the elephant in the (#German) room: Would a non Italian president have done the same? Not mincing his words on #Schaeuble
— Alessandro Speciale (@aspeciale) April 21, 2016
Draghi: "My talks with Schauble were friendly" pic.twitter.com/1ePHzZbsWq
— Mehreen (@MehreenKhn) April 21, 2016
Draghi "To explain real rates to savers might be difficult. That's your job, I would say" (to German reporter)
— Lorcan Roche Kelly (@LorcanRK) April 21, 2016
Draghi: Don't blame low interest rates for everything
Q: German citizens are seriously worried about their private pension schemes, as the yield on government bonds are so low. Did you discuss this, and what do you say to Germans?
Yeah, we are familiar with these concerns, and we are watching it, Draghi replies briskly.
It’s evident that pension funds and insurance companies are challenged by low interest rates.
And Draghi then takes another jab at his critics...
By the way, I would urge all the actors in this sector to blame low interest rates for the cause of everything that has gone wrong in this sector.
The US had low interest rate for much longer than Europe, he adds, without the same problems as in Europe.
And real interest rates (adjusted for inflation) have been lower in the past.
Explaining real rates to savers may be difficult... that’s your job, I suggest, he concludes. Another slap to his German critics.
Draghi: With rare exceptions, monetary policy has been the only policy in the last 4 years to support growth
— ECB (@ecb) April 21, 2016
Draghi: Europe needs growth-friendly fiscal policies
Draghi is in a snappy mood today, repeating that the ECB’s measures have supported growth in the eurozone.
Indeed, they have been the only policy to support growth in the last four years (with rare exceptions). That’s a second slap at Germany!
But for sustainable growth, Europe also needs structural reforms and an appropriately supportive fiscal policies.
That means growth-friendly government policies, including lower taxes, lower public expenditure, and more investment, Draghi insists.
#Draghi: "our monetary policy has been the only policy in the last 4y to support growth" => #ECB control to major Wolfgang, can you hear me?
— Maxime Sbaihi (@MxSba) April 21, 2016
Updated
Q: Last month you suggests interest rates are unlikely to fall again. Has that position changed?
Draghi says that the experience with negative interest rates has been largely positive so far. They haven’t hurt banks’ income, and they hasn’t been a pass-through to customers.
But the ECB is also awake to the added complexity that negative rates brings.
And for the umpteenth time, #Draghi rebukes banks' argument that negative rates are hampering their profitability -- #ECB
— Alessandro Speciale (@aspeciale) April 21, 2016
Q: How concerned are you about the recent rise in the euro?
As I’ve said many times, the exchange rate is not a policy target, although it’s an important factor in growth and inflation, Draghi says,
The measures we took in March will be effective in avoiding ‘second round effects’ (pushing inflation rates even lower)
Q: Are there any circumstances under which the ECB could consider helicopter money? Is it legal under EU law?
We didn’t discuss it, Draghi repeats firmly.
Is it me or did #Draghi once again dodge the helicopter money question? "We haven't discussed it" isn't the same as "We can't do it".
— Peter Spiegel (@SpiegelPeter) April 21, 2016
Updated
Draghi then cites research showing that Eurozone GDP would be 1.6% lower if the ECB had not launched its stimulus measures. Inflation would be lower too.
Draghi defends ECB independence
Mario Draghi has just robustly defended the ECB against critics of its stimulus packages.
Q: Is Draghi concerned about criticism from German politicians* over its monetary policy?
We have a mandate to implement monetary stability across the eurozone, not just Germany, Draghi replies, declaring:
We obey the law, not the politicians, because we are independent.
He then reveals that the ECB’s governing council discussed this issue today, and was unanimous in defending the independence of the ECB.
Our politicie work, they are effective, just give them time to work, Draghi adds. And they would work faster if European politicians implemented structural reforms.
* - this month, Germany’s finance minister accused the ECB of fuelling the rise of euro-sceptic parties in Germany.
#Draghi: we had a "brief discussion" about recent criticism from Germany and we were "unanimous in defending the independence of the #ECB".
— Maxime Sbaihi (@MxSba) April 21, 2016
Draghi: We didn't discuss helicopter money
Q: Has the ECB considered helicopter money this month?
Draghi repeats his statement from last month (that helicopter money is an interesting idea that economists are looking at).
We have not talked about it, he insists.
Onto questions...
Q: Can you give more details about the corporate bond-buying programme announced last month?
Draghi says that all non-banks are eligible, including the parent companies of firms which own banks.
Draghi "If a company owns a bank, but parent is not a bank, it is eligible"
— Lorcan Roche Kelly (@LorcanRK) April 21, 2016
Good news for carmakers, there.
Good summary:
#Draghi so far: inflation could turn negative again but our policies are supporting the recovery and we stand ready to do more.
— Maxime Sbaihi (@MxSba) April 21, 2016
Draghi then give his own trumpet a little toot, saying the measures put in place since June 2014 have clearly helped the eurozone economy:
Draghi: Overall, our measures in place since June 2014 have clearly improved borrowing conditions for firms and households
— ECB (@ecb) April 21, 2016
And the ECB president concludes with his traditional call for eurozone governments to take structural reforms now, and implement the eurozone’s stability pact.
All countries should strive for a more growth-friendly composition of fiscal policies, he adds.
Draghi says this every month, and it’s not clear that European politicians are really paying attention:
Draghi would like policymakers to do more. #whodathunkit
— Aengus Collins EIU (@aenguscollins) April 21, 2016
Draghi: inflation could turn negative again
Sounding suitably cautious, Draghi says that the risks to Eurozone growth remain “tilted to the downside”.
Inflation could turn negative again in the coming months, and uncertainties in the global economy are also holding back growth.
But the ECB is still confident that inflation will then rise back toward the ECB’s target. And he cites surveys showing that demand for bank lending is picking up.
Shorter Draghi: "So far, so good so back off ok?"
— World First (@World_First) April 21, 2016
Updated
Draghi adds that it is essential to preserve “an appropriate degree of monetary accommodation” for as long as needed.
That’s another hint that the ECB has more tools, if needed.
Draghi says that broad financing conditions in the euro area have improved since the ECB announce its “comprehensive package of decisions taken in early March”.
Draghi: Rates could be cut again
Mario Draghi begins with a prepared statement as usual.
He confirms that the ECB left interest rates unchanged, and immediately drops a hint that further cuts are possible!
Draghi says:
We continue to expect them [interest rates] to remain at present, or lower, levels for an extended period of time - and well past the horizon of asset purchases.
*DRAGHI: SEES RATES AT PRESENT OR LOWER LEVELS FOR EXTENDED TIME
— Michael Hewson (@mhewson_CMC) April 21, 2016
Mario Draghi and colleagues have arrived, a few minutes late..... (when last happened, it emerged that they’d got stuck in a lift!).
Watch the press conference live here
Here’s a live feed of Mario Draghi’s press conference, which starts in 5 minutes.
I’ve tried to embed it at the top of the blog too, so you might need to refresh this page.
The sudden rise in the euro is a little curious, as every economist had expected the ECB to leave rates on hold.
The euro is strengthening against the US dollar, now up 0.5% at $1.135 (from $1.130 this morning).
That won’t please Mario Draghi too much. Perhaps he’ll manage to talk it down....
EURUSD goes stratospheric before Draghi because markets
— World First (@World_First) April 21, 2016
Nancy Curtin, Chief Investment Officer of Close Brothers Asset Management, says that the eurozone economy looks a bit less troubled than six weeks ago, at the last ECB meeting.
“After Draghi brought out the big guns last month, he was never realistically going to up the ante further on monetary easing in April. The modest recovery in the Eurozone’s economic fortunes placed the ECB on somewhat firmer footing ahead of the decision. Lending conditions have improved in the bloc, business confidence seems to be climbing, and unemployment is falling. That’s not to say the recovery is entrenched by any means. Deflationary pressures remain prominent, the euro has been strengthening, and the impact of the forthcoming EU referendum in Britain will no doubt cause some uncertainty.
“The door is certainly not closed for further monetary stimulus, but given market scepticism about its long-term efficacy, it’s likely Draghi will keep any further measures back for moments of future turmoil.”
Reminder: At the last ECB meeting, Mario Draghi and colleagues threw the kitchen sink at the eurozone’s struggling economy.
They slashed interest rates to zero, hit banks with deeper negative rates but also offered them free loans, boosted their bond-buying programme to €80bn/month, and started buying corporate debt.
Today’s meeting couldn’t match that for drama, but we’re going to hear more details of the plan.
We’re also expecting questions about opposition to the ECB’s plan from some German politicians, and about the idea that central banks could be forced to monetise government debt or hand free money to citizens (helicopter money).
Updated
Monetary policy decisions: rates unchanged https://t.co/ZxI4DTVxHv
— ECB (@ecb) April 21, 2016
With rates on hold, we now wait for Mario Draghi’s press conference, in around 40 minutes (1.30pm BST or 2.30pm in Frankfurt).
The ECB says that Draghi will give more details about the stimulus measures he announced last month:
Regarding non-standard monetary policy measures, we have started to expand our monthly purchases under the asset purchase programme to €80 billion.
The focus is now on the implementation of the additional non-standard measures decided on 10 March 2016. Further information on the implementation aspects of the corporate sector purchase programme will be released after the press conference on the ECB’s website.
ECB leaves rates unchanged at record lows.
Here we go! The European Central bank has left interest rates unchanged.
That means:
- the headline interest rate across the eurozone stays at zero, a record low.
- The deposit rate (for commercial bank deposits at the ECB) remains at minus -0.4%. That means banks will still be penalised for leaving money in Draghi’s vaults.
- The marginal lending facility (which banks pay to borrow from the ECB) remains at +0.25%.
And the ECB has also left its bond-buying programme unchanged, at €80bn per month.
#ECB keeps rates unchanged as expected, wait for Draghi presser. pic.twitter.com/iluEI5kZLS
— Holger Zschaepitz (@Schuldensuehner) April 21, 2016
Two minutes to go until the European Central Bank decision!
Just enough time to flag up this useful chart showing which ECB policymakers have been pushing for more monetary easing (the doves), and which are less convinced (hawks)
CHEATSHEET: Here's your new #ECB Spectrometer, updated with latest statements. Weidmann and Praet have moved a bit. pic.twitter.com/U4xeXE3Zov
— Maxime Sbaihi (@MxSba) April 21, 2016
Sweden’s central bank has highlighted the weakness of Europe’s economy, by boosting its stimulus package.
But the move has also shown the limitations of monetary policy to move the markets.
The Riksbank has announced it will boost its government bond-buying programme from 200bn Swedish krona to 245bn. That is designed to pump more money into the economy, and prevent the krona strengthening further against the euro.
However, the markets didn’t take the hint -- the krona actually strengthened immediately after the announcement.
One for older readers: <ding>
Watching #SEK market reaction to #Riksbank QE extension reminds me of 1970s British TV pic.twitter.com/IlCtbMJgfW
— marksastley (@astleyeconomics) April 21, 2016
Economist Sean Richards has written more about the Riksbank move, and the limits of central bankers, here:
Will central banks forever cry “To Infinity! And Beyond!”
EIU: Europe facing crisis crunch this summer
Europe’s weak recovery, despite the ECB’s ultra-loose monetary policy, is one key reason why the region is being “stretched to the limit”, says the Economist Intelligence Unit in a new report.
The EIU fears that Europe could be driven into heightened crisis this year, by problems such as migration, Britain’s EU referendum, and Greece’s debt woes.
And the biggest risk facing Europe, according to the EIU, is that multiple challenges will come to a head simultaneously, overwhelming the region’s policymakers.
This could happen as soon as mid-2016, when the UK votes on whether or not to remain in the EU, Greece has large debt payments falling due and this year’s migrant influx is likely to peak.
Here are the seven separate problems that could scupper Europe’s hopes of ‘muddling through’:
-
Migration: The migration crisis touches on crucial issues of sovereignty, culture, borders and free movement. Europe’s confused response so far has risked worsening the problem, although there are tentative signs that the recent EU-Turkey deal has slowed migrant flows.
-
Brexit: The risks of the UK leaving the EU have increased over recent weeks—chiefly because of a series of hits to the reputation for competence of the prime minister, David Cameron—but we continue to expect the UK to vote “remain” in June.
-
Grexit: We expect Greece to leave the euro zone during our five-year forecast period. Grexit would represent a huge political failure for the bloc, with potentially destabilising consequences: the principle of irreversibility would have been shattered.
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Monetary policy: A deepening reliance on accommodative monetary policy has been one of the hallmarks of the post-crisis period in Europe. This is creating its own challenges which the region is hard placed to address.
-
Productivity: The region faces an ongoing crisis of productivity which it needs to address if it is to deliver improved growth.
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Regional security: Russia has become aggressively revisionist in the last several years, posing a challenge to the regional security architecture.
- Populism: Populist movements have come to prominence in rich and poor countries alike, and the region will struggle to manage the implications of an erosion of post-war political structures and voting patterns.
Aengus Collins, Country Forecast Director at The Economist Intelligence Unit, warns that politicians are failing to tackle these crisis:
“Policymakers appear increasingly unable to understand and respond to the desires of their electorates. This is leading to voting patterns that could have lasting destabilising effects.
Nowhere are people more jittery about electoral risk right now than in the UK. We’re sticking with our years-old forecast that in June the UK will vote to remain in the EU—the pull of the status quo will strengthen as the vote draws closer and the risks of Brexit crystallise—but all the momentum has been with the “leave” campaign in recent weeks and nothing can be taken for granted.”
And on monetary policy, the EIU warns:
The idea that the ECB can boost the euro zone singlehandedly bumped up against the law of diminishing returns some time ago. In every speech he makes Mr Draghi exhorts the euro zone’s political leaders to do more to promote growth in their economies. There is little evidence that they take these exhortations seriously....
The full report is online here:
Europe stretched to the limit
Updated
One hour to wait until the European Central Bank announces its decision on monetary policy, followed by a press conference at 1.30pm BST.
City analyst Arjun Lakhanpal says Mario Draghi will try to reassure investors that his latest stimulus measures will work, and that further action is possible:
After the slew of measures unveiled at the March ECB meeting desks do not expect any significant action this week
— Arjun Lakhanpal (@Arjun_lakhanpal) April 21, 2016
Several analysts have noted that many of the major global risks that the ECB was concerned about at the March meeting seem to have diminishe
— Arjun Lakhanpal (@Arjun_lakhanpal) April 21, 2016
Draghi’s task according to some analysts is to ensure that this phase of the easing cycle does not looking like passive policy
— Arjun Lakhanpal (@Arjun_lakhanpal) April 21, 2016
As such expect him to stress the ECB’s focus on their mandate and their willingness to ease further.
— Arjun Lakhanpal (@Arjun_lakhanpal) April 21, 2016
John McDonnell MP, Labour’s Shadow Chancellor, says chancellor Osborne must take the blame for missing the UK’s borrowing targets in the last financial year:
“The latest figures for public sector borrowing show George Osborne is on course to miss his only remaining target for the economy, with the Tory Government’s deficit significantly higher than forecast. Government debt is rising even as unemployment increases and exports slump.
“This is a record of further failure from the Chancellor of the Exchequer. His recovery is built on sand and his unaffordable and counterproductive fiscal targets mean that failures will continue. Labour’s Fiscal Credibility Rule would set a realistic target to get rid of the deficit on day-to-day spending whilst allowing government the capacity to invest in the high-tech, high-wage economy of the future.”
The London stock markets has fallen into the red following the public finance figures, and the fall in UK retail sales.
The FTSE 100 is down 50 points, or 0.8%, at 6360. Media group Sky is leading the fallers after reporting slowing customer growth numbers this morning.
Conner Campbell of trading firm SpreadEx says:
A double dose of dismal data was responsible for the index’s slide, with retail sales plunging to -1.3% (nearing those post-Christmas lows) and the UK’s borrowing figures overshooting George Osborne’s targets by £2 billion (to £74 billion) for the 2015/16 financial year.
This chart puts the retail sales fall in context:
Retail sales are always volatile month-to-month. But last month saw the biggest fall (ex fuel) since early 2014 pic.twitter.com/XOMVotjLId
— Ed Conway (@EdConwaySky) April 21, 2016
Britain’s Debt Management Office has announced it will sell an extra £2.1bn of government debt, to cover the shortfall in the public finances.
George Osborne’s second term as chancellor hasn’t got off to a good start, says Ross Campbell, director for public sector policy at The Institute of Chartered Accountants in England and Wales:
“Within the first year of new Parliament, Chancellor George Osborne has missed his deficit target by £1.8bn.
It was always apparent that there was very little margin for error and that any small change in assumptions for public expenditure plans would make it difficult to hit the Chancellor’s £72.2bn deficit target. Unless the UK economy, against the backdrop of a global economy that is unwilling to help the Chancellor dig himself out of out of his fiscal hole, improves somehow, it looks like the notion of returning to surplus by 2020 is highly improbable.”
Here’s the official Treasury response to today’s borrowing figures:
Today’s figures confirm that the record post-war deficit we inherited has been cut by almost two thirds as a share of GDP.
“We are borrowing £18 billion less than last year and March’s monthly borrowing was the lowest for a decade.
“But while the deficit is falling, the job of repairing the public finances is not done and the Budget set out action to ensure that debt falls in 2016-17 and Britain is back in the black by the end of this parliament.”
Economists: Osborne's budget plans are in doubt
Economists are warning that Britain’s public finances could be facing further problems.
Samuel Tombs of Pantheon Macroeconomics points out that today’s borrowing figures don’t show the impact of the recent economic slowdown.
The risk of a much bigger overshoot this year has grown as the economy has slowed.
With the fiscal projections also resting on optimistic assumptions for revenues from tax avoidance measures and savings from the welfare budget, we continue to think that the Chancellor will have to implement even more austerity than planned to achieve a budget surplus by 2020.
Nina Skero of the Centre for Economics and Business Research agrees that George Osborne is unlikely to meet his goal of eliminating the deficit.
With income tax thresholds set to rise over the remainder of this parliament, not only does the government face restrictions on cutting spending, but also on generating revenue.
Therefore, it is very likely that within a couple of years the Chancellor will be faced with the unenviable task of deciding between cutting long-term investment spending or giving up on the self-imposed goal of eliminating the deficit by 2020. As cutting long-term investment spending eventually results in lower economic growth, Cebr believes that in this situation the Chancellor would be forced to abandon or postpone his deficit-eliminating ambitions. We expect a deficit of just over £30 billion in 2020.
Today’s public finance figures could have been worse for the chancellor, argues Howard Archer, economist at IHS Global insight.
George Osborne will be open to criticism as he missed the 2015/16 public finances targets that were set out as recently as March’s budget – but he will probably be pretty relieved that a much improved March performance meant that the miss was narrow.
Furthermore, he can argue that the public finance data will be revised many times over the coming months so there is a realistic chance that the final figure will show that he achieved his targets.
George Osborne has been dealt “yet another blow” by the news that Britain borrowed almost £2bn more than targeted last year, says Peter Spence of the Daily Telegraph.
It’s particularly awkward for the chancellor, as he read out the lower target to the House of Commons just last month.
Peter explains:
Revealing the OBR’s forecast at the Budget in March, the Chancellor announced that the Government expected to borrow £72.2bn in the fiscal year.
However, it quickly became apparent that the UK would have to borrow more than planned.
A week after the new targets were made public, ONS figures showed that the public sector had borrowed £70.7bn in the first 11 months of the financial year, leaving Mr Osborne with just £1.5bn to play with in March - a number he has failed to meet, barring a drastic revision of the figures at a later date.
The British government has already missed the borrowing targets it set itself last month https://t.co/gbdV5LCamf
— Peter Spence (@Pete_Spence) April 21, 2016
UK borrowing overshoots Osborne's target
Britain borrowed more than expected in the last financial year, in another blow to George Osborne’s attempts to eliminate the deficit.
The UK borrowed almost £74bn to balance the books in the 2015-16 financial year, according to new figures.
That’s almost £2bn more than the official forecast from the Office for Budget Responsibility in last month’s budget.
It’s an embarrassment for George Osborne, and underlines how hard it will be to eliminate the deficit this parliament (as he is aiming to).
Osborne misses his 2015-16 full year borrowing target by £1.8bn: https://t.co/9BDj9pfxWe pic.twitter.com/1frWU6yX1K
— Ben Chu (@BenChu_) April 21, 2016
The UK deficit is still coming down.; £74bn is around £17bn less than was borrowed in the previous 12 months.
But the total national debt has now hit £1,594.1 billion, equivalent to 83.5% of Gross Domestic Product.
Updated
UK retail sales disappoint
Discouraging news from the UK high street.
British retail sales slumped by 1.3% in March, much worse than expectations of a 0.1% decline.
Ouch! UK ONS: Monthly the quantity bought in the retail industry is estimated to have decreased by 1.3%. #GBP #GDP #BoE
— Shaun Richards (@notayesmansecon) April 21, 2016
On an annual basis, retail sales were 2.7% higher than in March 2015. But average store prices fell by 3.0% in March 2016 - the 21st consecutive month of year-on-year price falls.
German rift could dominate ECB press conference
Today’s ECB press conference is unlikely to be as dramatic at last year’s ‘Glitter Bombing’, when protester Josephine Witt jumped on Draghi’s desk before being carried out.
Instead, Marc Ostwald of ADM Investors services expects plenty of questions about the effectiveness of the ECB’s policies, the health of the banking sector, and the rift with Germany.
Two weeks ago, German finance minister Wolfgang Schäuble made an astonishing attack on Draghi – blaming the ECB for the rise of the eurosceptic Alternative für Deutschland party.
As Schäuble put it:
“I told Mario Draghi … you can be very proud [of AfD’s rise].”
Schäuble’s remarks pushed the boundaries of central bank independence (if not hurdling them altogether). And it’s notable that Germany’s man at the ECB, Jens Weidmann, rebuked Draghi’s critics last week.
So Draghi is going to be quizzed about this issue today....
This #ECB meeting will be less exciting than the last. Still, expect a combative #Draghi + new words on corporate bonds, helicopter, Germany
— Maxime Sbaihi (@MxSba) April 21, 2016
Mario Draghi could surprise the markets today by hinting at future interest rates cuts if growth and inflation don’t pick up.
So suggests Frederik Ducrozet, senior economist at Banque Pictet, the Swiss private bank.
That would require a u-turn from Draghi, who suggested last month that rates were unlikely to go lower. That sent the euro soaring – which won’t have pleased the ECB.
Ducrozet, the only economist to predict last month’s wide-ranging stimulus measures, also told Bloomberg TV that Draghi shouldn’t be worried by criticism from Germany.
It’s good news that Germany is concerned, Ducrozet argues, as it shows that the ECB is setting monetary policy for the eurozone as a whole (rather than trying to placate its largest member). If Germany were happy, that would be bad as it would mean the ECB were setting a two-tiered policy.
Ducrezet adds that Mario Draghi should aim to be calm and confident at today’s press conference, and reassure investors that his plans are working.
I’m not saying he will have an easy ride, but he should stick with his own message…. no stress, and be very proud Mr Draghi.
*DUCROZET SAYS DRAGHI COULD SURPRISE ON FUTURE RATE CUTS TODAY
— Brenda Kelly (@Brenda_Kelly) April 21, 2016
*DUCROZET SAYS GERMAN CRITICISM NOT BIG PROBLEM FOR ECB
Updated
Bild: Is Draghi burning our money?
To see the concerns within Germany over the ECB’s ultra-loose monetary policy, just check the Bild tabloid today.
It asks: “Verbrennt Draghi unser Geld?”, or “Is Draghi burning our money?”, by cutting headline interest rates to zero and hitting banks with negative interest rates.
How do you tell it's #ECB day? By reading @BILD's headlines: "Is Draghi burning our money?" https://t.co/IdzCYtfedt pic.twitter.com/MV37aEovx6
— Maxime Sbaihi (@MxSba) April 21, 2016
Bild’s complaint is that savers get virtually no return on their cash:
Savers are paying the bill. Draghi (nicknamed Super Mario) is burning their hard-saved cash!
However, the usual counterfactual applies – how much trouble would we be in if central banks had NOT eased monetary policy, or more banks had been allowed to fail?
European stock markets have mostly opened higher this morning, although many investors are sitting tight until they hear from Mario Draghi.
Draghi facing grilling over helicopter money
Mario Draghi will face questions today about the impact of negative interest, and the idea that central banks could be forced to drop money from the skies to get inflation up.
So predicts Mark Haefele, global CIO at UBS Wealth Management.
We expect no action from the European Central Bank (ECB) when it meets this Thursday. However, we do think investors should pay close attention to ECB President Draghi’s words at the post-decision press conference.
He is likely to respond to three key questions that many in the markets, including us, would like answered. First, are current policy measures like negative interest rates doing more harm than good? Second, are more out-of-the-box policy options like “helicopter money” in discussion? Third, what is the ECB’s early take on longer-term growth and inflation?
Helicopter money is the idea that central banks releases money directly to the private sector.
Last month, Draghi described it as a “very interesting concept” which the ECB “haven’t really studied yet” -- hardly a rejection of the whole idea.
Helicopter money would be unpopular with the ECB’s existing critics, but might reassure investors who fear Dragh is running out of weapons, says Haefele.
And on negative interest rates, Haefele adds:
Markets want answers to the charge that sub-zero rates are doing more harm than good, squeezing bank profits rather than spurring them to lend. ....
If markets are reassured that the ECB will only lower deposit rates further in the event of a deflationary shock, Eurozone banks shares may recoup some of their near 20 percent year-to-date losses and regain some of their confidence to lend.
More here: Here’s what to watch on ECB decision day
Updated
Asian stocks rally again
Stock markets across Asia have risen as investors wait to hear from Mario Draghi today.
Japan’s Nikkei led the charge, closing up 457 points or 2.7%. Australia jumped by 1% and Hong Kong has gained 1.7%.
This sent Asian markets to the highest levels in almost six months.
Lingering hopes that oil producers might (eventually) agree some kind of production freeze also pushed up shares, traders said.
#Japan's Nikkei ends up 2.7% at 17363.62 while Yen steady after BoJ has signaled to increase ETF purchases. pic.twitter.com/hLFJrX5FMp
— Holger Zschaepitz (@Schuldensuehner) April 21, 2016
The Agenda: UK public finances and the ECB
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
It’s ECB Day again. Over in Frankfurt, the governing council of the European Central Bank is gathering to set monetary policy across the eurozone.
We’re not expecting any new stimulus measures today. It’s only six weeks since ECB chief Mario Draghi slashed interest rates and also boosted the Bank’s quantitative easing programme.
So Draghi could find himself fending off criticism from German politicians, including finance minister Wolfgang Schäuble, for hurting savers with record low interest rates.
No expected policy change at today's ECB meeting could mean Mario Draghi gets political by defending the bank against German criticism
— Jasper Lawler (@jlawler_CMC) April 21, 2016
There will be interest in what Draghi says about the battle against deflation, the latest deadlock between Greece and its creditors, and perhaps even domestic issues such as the rise of populist parties in Europe and Britain’s EU referendum.
Speaking of Britain, we get the latest UK retail sales and public finance figures this morning. After yesterday’s rise in unemployment, economists will be looking for further signs that growth is slowing down.
We’ll also have an eye on Greece’s bailout talks, and the scandal around Japanese carmaker Mitsubishi which admitted faking fuel efficiency tests. Volkswagen was not alone....
Here’s the main events:
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9.30am BST: UK retail sales for March
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9.30am BST: UK public finances for March
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12.45pm BST: ECB announces monetary policy decision
- 1.30pm BST: Mario Draghi’s press conference
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