Brexit may seem like the west’s biggest problem. But look at the US economy
London (Jun 5) Britain is trapped in its own little Brexit bubble. For the next two and a half weeks, the country will be obsessed with the result of the referendum on 23 June. Nothing that is going on in the rest of the world will get much of a look-in.
But beyond these shores, things are happening. The authorities in China are desperately trying to shore up growth. Eurozone finance ministers have all but guaranteed that, sooner or later, the Greek crisis will flare up again. Most pressingly, the US economy looks to be heading for serious trouble.
Make no mistake, the jobs report issued in Washington on Friday was a shocker. Wall Street had been expecting the non-farm payroll – the benchmark for the strength of the US labour market – to increase by 164,000. The actual figure was 38,000, the smallest monthly increase since September 2010 . True, the total was slightly distorted because 35,000 striking workers at Verizon were counted as jobless because they were not being paid. But that still would have meant an NFP increase of just 73,000.
The weak jobs report comes at a particularly sensitive time because America’s central bank, the Federal Reserve , has been softening the markets up for an increase in interest rates, either this month or next. Any such move is now out of the question. US borrowing costs will not be going up again until the autumn at the earliest.
This is all rather chastening for the Fed. When it raised interest rates in December for the first time since the Great Recession, the central bank signalled that there would be four more increases during the course of 2016.
Financial markets subsequently went into freefall during the early weeks of the year, forcing the Fed into a crash rethink. In March, it indicated that the number of 2016 rate increases had been halved from four to two – but the guidance was promptly ignored by traders, who based their decisions on the assumption that there would be no further tightening of policy by the Fed until 2017.
With its reputation at stake, the Fed has gone out of its way since March to convince the markets that it was serious about two rate rises in 2016. Really, really it was. Janet Yellen , the Fed’s chair, told Wall Street that it might be “confused” about the way the central bank was going about its business.
Yet if anyone is confused it is Yellen, not the markets, which have rightly calculated that the Fed is all talk and should be judged by what it does and not by what it says.
Here’s the position. The US economy grew at an annualised rate of 0.8% in the first quarter of 2016 , which was not just weaker than the UK but substantially worse than the eurozone. Friday’s May payrolls were not a one-off, since the totals for March and April were revised downwards by a combined 59,000.
Even what looked like good news – a drop in the unemployment rate – was caused by discouraged workers giving up hope of finding a job. Growth will pick up a bit in the second quarter on the back of stronger consumer spending, but not by all that much.
In the circumstances, it beggars belief that the Fed will raise rates in the next couple of months. If Yellen continues to talk tough, the markets will throw a tantrum, and that will be enough to tip an already feeble economy over the edge into recession. Share prices will plummet, the oil price will head back towards $30 a barrel. It will be like early 2016, only worse.
So all the Fed can do is respond to the data by toning down the rhetoric. That will be embarrassing. It will mean eating humble pie. It will further damage the bank’s credibility. But it has no choice.
The writing’s on the wall for Opec – and Riyadh knows it
No one got in much of a lather about the failure of Opec to agree anything meaningful at the ministerial meeting in Vienna last week. In fact, the only announcement the oil cartel had to make was that they had picked a new (Nigerian) secretary general.
Why the calm? One, because the oil price is drifting upwards again anyway; two, because everyone has become used to Opec agreeing nothing; and three, because the world of black gold is increasingly losing its glitter.
No one has yet found a way to fly commercial planes without aviation fuel from hydrocarbons, road transport still relies on petrol, and power stations still produce electricity from gas.
But the writing is on the wall for those at Opec’s gatherings and the oil industry around them. Global governmental action to counter climate change, plus the fast development of electric vehicles and storage systems, will crush the oil industry. The question is not if but when, and the decline is likely to be faster than many imagine.
Oil-rich Saudi Arabia knows this. It has announced plans to dilute its holdings in the state oil company, move its economy away from petroleum dependency and put its cash in other activities, including low-carbon ones. The Saudis are investing in solar, in carbon capture and in tech companies. Last week, the Saudi sovereign wealth fund put $3.5bn into ride-sharing business Uber . The oil companies, led by Total, have been buying stakes in “green” businesses, such as windfarms, and battery and storage firms like Saft .
Meanwhile, traditional car manufacturers are making similar moves. Toyota has also invested in Uber , while Volkswagen has purchased a stake in a similar business, Gett. General Motors and BMW have also bought into ride-sharing services – Lyft and Scoop, respectively. Tech entrepreneur Elon Musk reckons his new line of electric storage systems will sell as fast as his Tesla electric vehicles (EVs).
The message for the future is: “Don’t think Opec, think EV.”
The UK is content to avoid doing much about tax
On Friday, police searched the Spanish HQ of Santander for evidence of its customers hiding their money in HSBC’s Swiss private bank. A few days before that, French magistrates raided Google’s head office in Paris over suspicions of tax evasion.
European parliament members will rubber-stamp the mandate of an inquiry into the Panama Papers this week. They fully intend to call George Osborne and HM Revenue and Customs bosses as witnesses, to explain why London now rivals Zurich as a money-laundering hub.
Further afield, in Brazil , El Salvador , Peru and even Panama , there have been raids on the offices of Mossack Fonseca, the law firm at the heart of the Panama Papers revelations. Nevada fined the firm’s local representative, which is now closing down.
Even in Switzerland , April’s disclosures prompted a search of Uefa’s HQ as well as the retrieval of an allegedly Nazi-looted Modigliani painting from the vaults of the Geneva Freeport warehouse.
Meanwhile, at the Hitchin offices of Mossack Fonseca’s UK representative, where the paperwork of thousands of offshore companies was processed, life goes on as normal. Successive scandals have made one thing clear: Britain seems happy to leave the policing of tax matters to its European neighbours.