When it comes to fiscal and monetary policy, it’s not easy to escape your history – but that doesn’t mean it can’t happen.
Take Germany. The IMF and several other leading financial institutions have (for some time) been calling on the German government to open the spending spigots. Yet even now, memories of hyperinflation in the Weimar Republic during the 1920s (not to mention what followed) loom large in the national consciousness. Indeed, when Wolfgang Schäuble departed as finance minister in 2017, his staff lined up in the shape of a zero for his leaving photo; such was his zeal for balanced budgets.
That zeal may be starting to flag. The current chief economist at the finance ministry has broken with tradition by arguing that cheap borrowing (via ultra-low global interest rates) may validate a policy rethink. Full-blown Keynesianism this is not, but if even Germany might temper its budgetary prudence, then you can be sure a shift is under way.
The meeting of the European Central Bank in Frankfurt last week was decisive on this score. Having dropped its 2019 growth and inflation forecasts for the eurozone, the central bank then cut its key interest rate to -0.5% and pledged to buy $20 billion a month of eurozone debt to support growth and price stability. The ECB’s largest monetary stimulus in more than three years was a dramatic final act for Mario Draghi, who is due to step down as ECB president down later this year. The removal of an end date on the bank’s monthly purchases of bonds effectively introduces ‘QE infinity’, an approach already familiar to Bank of Japan watchers.
Investors were initially delighted by the news, and eurozone bond prices rose (not least in Italy), as did European stocks, although rises for the latter were held in check by worries over the banking sector. Investors were somewhat unnerved by Draghi’s acknowledgment that the committee had been divided on the latest round of decisions. There were more colourful responses too. Bild, a major German daily, complained that “Count Draghila is sucking our accounts dry”, while Donald Trump opined on Twitter that the ECB was successfully pushing down the euro against the dollar, thereby aiding exports, while the Fed refused to budge.
“By making QE extensions open-ended, we feel that QE-finity will be the focus of ECB policy from this point and we are inclined to think that this week’s cut in the deposit rate to -0.50% will be the last in the cycle,” said Mark Dowding of BlueBay Asset Management. “Over time, the emphasis may move more towards fiscal policy, but this will be a political decision and a transition which will only occur slowly in the case of Germany.”
Indeed, Draghi used the press conference to plug the idea that it was time politicians began to play more of a role in supporting growth too – via more stimulative fiscal policy. That debate is already gaining traction in the UK, with an election potentially imminent. While Sajid Javid has pledged increased spending in select areas, Labour is contemplating far more radical action via large-scale fiscal stimulus and the enforced transfer of a proportion of company shares to workers.
However radical, it is unlikely to make the headlines for long. Labour, like the Tories, risks merely showcasing its internal divisions at the forthcoming party conference – only the Liberal Democrats appear relatively united on Brexit. As for the prime minister, he now awaits the decision of the Supreme Court on whether his prorogation was illegal. Whatever the decision, he certainly made plain over the weekend that he intends for the UK to leave the EU on 31 October, no matter what parliament might have already voted.
The pound strengthened on rising expectations a no-deal Brexit will not happen, but the FTSE 100 appeared more sensitive to global events. A Hong Kong bid for the London Stock Exchange was rejected on Friday, but what appeared to move UK stocks most were continued signs of a rapprochement on trade between China and the US. Beijing suspended import tariffs on some US goods, and the White House postponed the next round of tariffs by a fortnight. Despite disappointing US growth data, the S&P 500 rallied over the week, helped in part by the dismissal of the president’s hawkish national security advisor. That move initially pushed down oil prices, but the drop now looks irrelevant; a drone attack on Saudi oil facilities over the weekend led oil futures to take their biggest jump since future began trading in 1988.
Meanwhile, as economists confirmed predictions of a recession in Germany, Ursula von der Leyen announced her senior appointments for the new administration at the European Commission. In the process, she signalled that she wants the Commission to play a more assertive role in global geopolitics and trade. The move comes just as Emmanuel Macron showed signs of wanting to pivot the EU more towards Russia, and against the usual backdrop of German nervousness over any kind of assertive foreign policy.
As Brexit continues to prey on the minds of investors, the impact of a possible no-deal Brexit on their main asset is also troubling homeowners.
House prices fell sharply last summer, dropping month-on-month until April this year. Economic uncertainty has affected the market since the referendum but worsened in recent months: in London, where fears of a ‘Brexit bubble’ loom large, prices continue to fall.1 Buyers and sellers have expressed their uncertainty by putting plans on hold – sales have fallen by 12% year on year since the vote.2
A year ago, Bank of England governor Mark Carney predicted that a no-deal Brexit would see house prices plummet. The OBR has forecast that it would see 10% knocked off house prices by 2021.
“In the meantime, the uncertainty may benefit those looking for a better mortgage deal,” says Paul Johnson, Senior Client Banking and Mortgage Manager at St. James’s Place. “Falling bond yields will cut lenders’ costs which would lower borrowing rates.”
With the Brexit drama expected to intensify over the coming weeks, market uncertainty is likely to continue well into 2020. “Now may be a good time to review your mortgage and consider fixing your rate before the Brexit deadline,” says Johnson.
Your home may be repossessed if you do not keep up repayments on your mortgage
1 HM Land Registry, UK House Price Index England: June 2019
2 Which?, ‘What will Brexit mean for house prices?’, September 2019
Amid the many variables determining the Brexit outcome, the possibility of a Northern Ireland backstop received particular attention last week. We asked Azad Zangana, Chief European Economist at Schroders, whether this solution might enable a deal.
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BlueBay and Schroders are fund managers for St. James’s Place.
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