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Week Ahead: will Osborne break the rules, or merely bend them?
Our preview of the main financial events of the coming week.
He has already bent the rules. Or at least taken to ‘smoke and mirrors’ tactics, as Labour put it, when he made the surprise decision this month to shift up to £35 billion in interest earned from government bonds bought under the controversial quantitative easing policy from the Bank of England to the Treasury.
Now chancellor George Osborne, desperate to keep the UK’s AAA credit rating, may break them when he delivers his Autumn Statement on Wednesday. Or as economists at Investec suggest, even turn to the fiscal 'dark arts' to avoid missing his targets.
He has two rules (the first a ‘mandate’, the second a ‘target’), both of which the Office for Budget Responsibility – the government’s fiscal watchdog – predicted would be met at the time of the March Budget.
The first rule, to balance the cyclically adjusted current budget in five years’ time, should be do-able, say City economists.
But the OBR may conclude that the other fiscal rule, stating that the debt to GDP ratio should be falling in 2015/16, could be missed. Certainly, the OBR – never as pessimistic as City forecasters – is expected to downgrade its growth forecast, and its outlook for government receipts. The group’s March forecasts of 0.8% GDP growth this year, and 2% growth in 2013 always looked optimistic.
So whether Osborne meets this second rule depends on how the pile of QE cash transferred from the Bank of England affects the numbers – we’re into Investec’s ‘dark arts’ here – or whether the chancellor finds another way to square the books.
Economists disagree as to whether the QE transfer will be enough: Jeremy Batstone-Carr of Charles Stanley reckons it’ll get the chancellor a ‘pass’ grade from the OBR; others say don’t try and pre-empt the OBR’s complicated economic modelling.
Bank of England unmoved
The weak economic growth that is making Osborne’s job so difficult is unlikely to prompt action from Mervyn King and his monetary policy setting team at the Bank of England when they meet this week. Neither an extension of the 'money printing' under quantitative easing, nor a cut to interest rates is expected, even as surveys point to a potential contraction in the economy after the 1% growth in the third quarter was confirmed by the Office for National Statistics.
The Bank has been partly waiting for results from its Funding for Lending programme to get banks to lend more before it decides whether to create more money beyond the £375 billion it has conjured so far to fund further purchases of government bonds. On Monday a first reading of the programme’s success is due, the same day that the UK PMI (purchasing managers index) manufacturing survey is published. The services PMI follows on Wednesday, while trade and industrial production data are due on Thursday.
The Bank of England is among several central banks making policy decisions in the coming week, with the Reserve Bank of Australia thought most likely to actually change policy.
Grim in Frankfurt
Investors though will most closely follow the European Central Bank’s policy decision. A cut in rates is thought unlikely, but inactivity is not a dead cert, with new unconventional policy measures still possible as the bank’s president Mario Draghi again delivers a downbeat growth outlook for the eurozone at his post-meeting press conference in Frankfurt.
Greece & fiscal cliff move markets
For jittery stock markets though, all of these major diarised events could be overshadowed by two things: Greece and the US fiscal cliff.
On Monday, European finance ministers meet in Brussels to potentially give the final sign-off to the next tranche of aid for Greece, after weeks of dispute.
Meanwhile, negotiations to avert a ‘fiscal cliff’ in the US will likely continue to dominate market sentiment, especially as congress’s 14 December adjournment draws near.
China could provide a few surprises. Its official PMI for November is due to be published on Saturday, with economists expecting further expansion as the economy continues to rebound.
And China’s end-year Economic Work Conference, at which senior officials set out priorities for the year ahead, could be held anytime over the next few weeks.
The Global Times, a newspaper directly controlled by China’s Communist Party, says the conference could be held as early as next week, with an economic growth goal of 7.5% set for 2013.
Saving the biggest ‘til last
The week ends with another major market moving event: the publication of US jobs figures, the non-farm payrolls report. This report, a sweepstake favourite among traders, will likely be smarting from the impact of Hurricane Sandy.
The jobs numbers, coupled with other major data due including the manufacturing ISM on Monday, are likely to show the world’s biggest economy continues along a tricky growth path.
Several major blue chip companies deliver trading statements over the coming week, starting with pumber's merchant Wolseley (WOS.L) on Tuesday, then Tesco (TSCO.L) on Wednesday, while Standard Chartered (STAN.L) bank follows on Thursday. Investors can expect half-year results from business IT provider Sage Group (SGE.L) on Wednesday.
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