IMF says Britain is back on track for growth, but Reeves could destroy this with a gung-ho budget, says ALEX BRUMMER
Growth in Britain is looking good after the International Monetary Fund has raised forecasts again.
Production is expected to increase 1.1 percent this year and could be even stronger given the rebound in the first half of the year.
By 2025, growth is expected to reach 1.5 percent. That is below trend, but moving in the right direction after the shocks of the pandemic and the Russian attack on Ukraine.
Nothing is guaranteed, and the past decade has shown that the biggest threat comes from unexpected shocks, such as the liability-driven investment (LDI) crisis.
Budget threat: If Chancellor Rachel Reeves goes too far, raising taxes and scaring businesses and wealth creators, she would jeopardize a fragile economic recovery
That broke out at the IMF annual meetings two years ago, following Liz Truss’s unaudited tax cut budget.
The IMF’s Global Financial Stability Report warns that high levels of debt, especially among unfettered non-bank players in the financial world, are among the biggest risks.
It points to stock market volatility in August this year, when the yen carry trade – hedge funds borrowing in the yen and investing in the US and elsewhere – imploded, proving how quickly markets can spin out of control.
The common feature of recent crises is the unexpected. Predicting the source of the quake is virtually impossible.
But cracks in the system can be addressed, preventing relatively small eruptions from turning into an earthquake. Reducing the debt burden, both in the public and private spheres, is one way to reduce risk.
As Britain finally escapes the cost of living nightmare, the authorities’ first duty is to stimulate growth.
Traditionally the IMF has been the guardian of fiscal fairness and is clearly shocked by the build-up of global debt. She has prioritized so-called ‘budget consolidation’ – technically speaking, it’s about austerity above all else.
There is one caveat that Chancellor Rachel Reeves should keep in mind as she wields the cleaver in next week’s budget.
If it goes too far, increases taxes and scares companies and wealth creators, it will endanger a fragile economic recovery.
If the economy were driven back into stagnation, this could lead to a doomsday scenario of deteriorating incomes and higher social security contributions.
Interest rate setters at the Bank of England play a crucial role. Inflation has been completely put back in its box.
The Bank is far too conservative in its decision-making. The last best hope for expanding production as taxes rise is a determined effort to cut interest rates. Otherwise, economic expansion will come to a standstill.
Asian tilt
Activist investors often get their way in the end. Elliott Advisors helped accelerate the demerger at pharmaceutical giant GSK, which saw the spin-off of consumer health arm Haleon.
On the other side of the world, HSBC’s new CEO, Georges Elhedery, has moved quickly to stamp his authority on the bank by seceding core Hong Kong.
Chinese and Asian operations – where most of the profits are earned – from Britain and other commercial banking operations.
The reorganization that creates two other separate divisions – one handling global corporate and investment banking and the other wealth management – simplifies the structure inherited from predecessor Noel Quinn.
He did the heavy lifting by selling extensive HSBC operations around the world.
What this all boils down to is the 8% shareholder, Beijing-controlled Ping An, which lobbied HSBC to implement the splits, is unclear. Reforming the group would ease the separation and return HSBC to its Asian roots.
However, in doing so it would sacrifice Bank of England regulation, a commitment it made when it bought Midland Bank in 1992.
In light of China’s security measures against Hong Kong and President Xi Jinping’s increasing authoritarianism, the Bank of England’s imprimatur should be appreciated more than ever.
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