Despite slowdowns, economic stalemate between Europe and China is set to continue

Henry Hopwood-Phillips 3.44pm

Economic data from China is mixed. The bad news is that after first-quarter GDP growth of 8.1 per cent, second-quarter growth is being revised downwards from 9.5 per cent to 7.8 per cent by Caixin, one of China’s leading financial publications.

Reuters reckons second-quarter growth will fall even further, by 7.6 per cent, the weakest rise since 2008. Other indicators fare no better. Industrial production has risen by the lowest amount in three years, at 9.6 per cent. Electricity consumption fell to 3.7 per cent from 7 per cent in March. Property prices fell in over half of China’s seventy leading cities. And manufacturing PMI suffered its eighth consecutive month of contraction, from 48.8 in  June to 41.8 in May.

The second set of statistics paints a rather different picture. Exports were expected to clock a 6.8 per cent rise but instead surged by 15.3 per cent to $181.1 billion, mostly due to American demand. Not only that, imports only increased 12.7 per cent, giving a healthy trade surplus of around $18.7 billion. One of those imports was oil, which was bought at a record rate of six billion barrels a day in May due mainly to its low price and unstable future.

Bears point to a real estate bubble, over-capacity, over-investment, and a consequent lack of inflation as signs of over-extension. Bulls tend to side more with Jim O’Neill of Goldman Sachs who notes that the historical weight placed on production stats is misplaced and that “indicators of consumption are becoming more important”; and Jack Perkowski of Forbes who reckons “the phrase ‘property bubble’ will no longer be in the vocabulary” reasoning that it must have bottomed out after nine-months of decline.

The Chinese government, noticing a slow-down in demand, has not been slow in reacting. It has cut its interest rates for a second time. Consequently the yuan weakened against the US dollar in Shanghai.

Further measures are also being taken. The monetary authority is pumping 225 billion yuan into the financial system by conducting reverse-repurchase operations. The last steps to lower the amount of cash banks need in reserve, started in November and freeing up 1.2 trillion yuan for lending, are being implemented. And investment projects, many in the underdeveloped interior and western parts of the country, are being fast-tracked.

Beijing also hopes to boost energy demand by subsidising energy-saving white goods to the tune of 26.5 billion yuan. Such measures make a mockery of bullish claims that the Chinese government would intentionally try to cool the economy down in order to tactically restructure it.

China knows the oil that lubricated the post-war global economy is running dry. As the purchasing power of the Western consumer, based at first on rising wages but later on rising house prices has evapourated, no significant replacement has compensated for that lost demand. According to Bloomberg’s David Roseberg over 80 per cent of the world’s top economies are now posting a contraction in industrial activity. The EU and US together account for approximately 40 per cent of Chinese total exports but China knows that its long-term future lies with its own domestic consumer. This is why it has not been afraid to upset the laissez-faire apple cart by playing dirty with its currency, by using state funds to stockpile underpriced rare earths whilst imposing quotas and caps that ensure they remain in its domestic market, by refusing to “save” the eurozone, and by imposing duties worth £2.1 billion on US-made cars.

But the long term is naturally a long way off. Though there is talk in some quarters that the West needs to restructure its economy from a consumer-driven to an export-based one and that China needs to do exactly the opposite, the fact remains that the Chinese, with no real welfare state to speak of, are driven by both economic necessity and to a lesser extent culture, to save and supply rather than consume and demand. The West also has a tendency to overlook the old cronyist fundamentals of the Chinese economy which ensure the masses have little option but to stash their cash.

The fact is that much of the economy is still run on political rather than economical capital and that many bad debts are still sloshing round the system. Current generations are also living with the repercussions of the one-child policy legacy left to them by Xiaoping in 1979. They must save because demographically fewer and fewer people must support an ageing 1950s baby-boom generation.

In the short to medium-term the Chinese middle classes are not going to be either big enough or rich enough to fill the demand gap left by western homo consumericus and that gap remains unfilled by both BRIC and MIKT countries. This is the biggest single factor in the Chinese growth slow-down from averaging 10-13 per cent in the past decade to more humble 8-9 per cent IMF predictions this year.

But the Chinese have so far refused to invest in European customers who live in a eurozone that, according to Jin Liqun, Chairman of CIC, they believe to be profligate, lazy and politically undecided. China wants a eurozone to rise in its own image, with a freer market at ground level and a more centralised political command.

However, both seem unlikely to materialise and so, ceteris paribus, until one side blinks the economic stalemate looks set to continue.

Follow Henry on Twitter @TheHolySmoke

Britain does need a banking inquiry

Michael Economou 10.30am

The late historian Ronald Syme wrote, “In all ages, whatever the form and name of government, be it monarchy, republic, or democracy, an oligarchy lurks behind the façade.”

It is difficult to argue that twenty-first century Britain is any different. Recent revelations in public life have begun to unveil a network of power, privilege and wealth that exercises a disturbing control over our country.

Politicians of all parties toady to media moguls and millionaires, trading policies for good stories and donations, while cabals of journalists and bankers abuse the system for profit.

The twisted mask concealing this state of affairs has developed cracks, through which we have glimpsed the true face of institutionalised corruption and an esurient elite. Cash for honours, the parliamentary expenses scandal, phone hacking, endless tax avoidance tales, and now the scandal of rate fixing among our major banks - these are all symptoms of the same disease, an economic and political culture built on cronyism and deceit.

The solution has never been reactionary leftism, anarcho-capitalism or any other sinister ideology pedalled by fringe politicians. The cure is sustained, old-fashioned One Nation conservatism that genuinely tries to end the frightening gap between the rulers and the ruled.

The Government should embrace calls from across the political spectrum for an inquiry into the British banking industry. The Governor of the Bank of England, Mervyn King, has argued against such a step on the grounds that “there must be many people who work in banking today who know that they are honest, hard-working and feel they have been let down by some of their colleagues and indeed their leaders.”

But this is precisely why we need an inquiry. The actions of a few rotten bankers are destroying the reputation of an entire industry. Just this year, banks have been attacked for mis-selling PPI, fixing Libor rates, and mis-selling interest rate swaps to small businesses. It is unlikely to end there.

What should we expect from a banking inquiry? Hopefully enough information for the Government to carry out the sensible reforms needed, rather than the futile and punitive tax rises that the Tories and the Labour party have used to get one over each other, and which act merely as punishment rather than rehabilitation.

Moreover, fish rot from the head down. If we don’t insist on better leadership from those at the top, then Britain shall sink under its own cynicism and disillusionment. Of course, a banking inquiry would only be a relatively small step, but it is necessary for us to fix thoroughly the banking system, build a new conservative consensus, and make sure that the British people don’t turn in their (entirely justified) revulsion to the sort of political movements that can only make things worse. It is time to smoke out the rats and put our economy in order.

Follow Michael on Twitter @MichaelEconomou

Conservatives must convince people it is the disadvantaged in society they care about most

Dan Watkins 11.58am

With our history as a trading nation, Britain has long favoured open markets and economic liberalism. Even in the presently difficult economic times, a majority of voters still believe that capitalism is the best way forward.

But despite the Conservative party being the country’s foremost supporters of capitalism, over the past two decades it has consistently polled in the region of 30 to 40 per cent. So the party’s Achilles heel is not its economics, but its social policy - or at least the public’s perception of it.

Rightly or wrongly, the Conservative party is perceived as the ‘party of the rich’. Lower income groups are discouraged from becoming supporters, fearing the party is not interested in them. Furthermore, many better-off voters seek to allay their social consciences by shunning the Tories. The two diverse groups represent millions of voters but can both be addressed by focusing on the disadvantaged - and if done successfully could push the party above the critical 40 per cent level of support.

In fact, it is only the Conservative party that can truly transform opportunities for the disadvantaged - the people who most rely on the public services that are in urgent need of reform. The Labour party’s strong ties to the unions and the large swathes of leftist supporters within the Liberal Democrat party, prevent either from taking the radical steps needed to improve social mobility.

The Tories are unencumbered by those vested interests and care just as much about helping all members of society as any other politician. But crucially, it is the belief in policies that fit the grain of human nature that give the Tories a genuine chance of success. The use of the ‘carrot and stick’, or positive and negative incentive, is what needs shouting about.

For instance, with welfare we have long offered benefits to people when they fall on hard times. For some recipients the ‘carrot’ works and they soon return to work. But for many others, the money is taken with no serious intent of finding further employment. They will only respond to the ‘stick’ - such as the threat of enforced community work or reduced benefits.

Consider another area - education - where again we are putting sensible incentives into play. We provide positive incentives to children from poorer families by improving their quality of education received via free schools, academies and the pupil premium. Yet those pupils who do not respond, and who cause disruption, will now face newly-liberated heads who possess a greater range of sanctions for pupils and parents. Teachers will also face positive incentives in the form of differential pay, syllabus freedoms and greater powers in the running of schools - but also the threat of dismissal if they consistently fail to perform.

This can be applied to all public sector workers. The Conservatives sorely need to improve their support among this group at a time when necessary public spending cuts threaten to offer them only the ‘stick’, not the ‘carrot’ (such as decentralisation or mutualisation). Examples such as the Civil Service Pension mutualisation should act as blueprints for other state institutions.

Of course, Iain Duncan Smith and Michael Gove have already begun implementing such policies in welfare and education. But we need to spell out to people time and time again how these measures shall directly help families on lower incomes. Likewise for reforms to the NHS, local government and social services. The Government’s programme is not all about deficit reduction in the slightest.

The next three years offer many opportunities to focus relentlessly on the disadvantaged in British society and demonstrate to voters that it is these people the Conservative party cares the most about.

Rhythm is a dancer at PMQs

Jack Blackburn 3.30pm

As Dave and Edward know (both being Oxonians) it is Commemoration Ball season: a time for dancing.

There was an element of that at PMQs today and, in the manner of the modern day ball, the participants were dancing without much discernible sense of rhythm. The music playing at the moment is much more to Edward’s taste than Dave’s, but everyone’s bringing out their own moves. Just don’t call it a U-turn. It’s a volte face.

These days, Edward Miliband has many dances he can trot out, but he chose the fuel duty “U-turn”: the latest contribution to the budgeting omnishambles, made all the more embarrassing by Chloe Smith’s unfortunate “Michael Howard moment” on Newsnight last night.

“U-turn? What U-turn?”, said Dave, claiming that it was a Labour tax they were getting rid of. “Ever since we came to office we have been defusing Labour’s tax bombshell.”

Dave’s major implication though was that the Leader of the Opposition was two-faced. He supports Lords Reform but is against the programme motion. He’s for stopping the increases in fuel duty, but against the Government’s “change of mind” to do so. The line Mr Cameron is trying to lay down by implication is that Mr Miliband is an opportunist.

Even though the Government has so far had an annus horribilis, there is no denying that Mr Miliband has looked more like a scavenger of their misery, than a viable alternative. This is despite a definite improvement in his personal style, most obviously marked in his weekly performances at PMQs. Nevertheless, he still cannot land a knockout blow, or even score open goals. The judges should be giving him nines and tens at present, but Edward’s twinkle-toes often leave himself at sixes and sevens.

Edward’s major problem is his lack of detail; his insistence on repeating debatable, rhetorical points as if they were indisputable facts. Things are going for him at the moment, but he just isn’t producing. What will happen when the fortunes turn, and the government starts getting the rub of the green?

Furthermore, the Government couldn’t be doing more to help Edward out. Today, while defending George Osborne’s alleged “cowardice” in not facing the press yesterday, the Prime Minister said that the Chancellor had faced the Commons, and in doing so had “wrong-footed” Ed Balls. That’s all well and good, but George Osborne’s adroit volte face wrong-footed everyone, to the point that Cabinet ministers were briefing for the increase all through yesterday morning, and poor Chloe Smith was sent up Newsnight creek, without a paddle, or a boat.

With all of this ammunition at his disposal, Edward still failed to score a clear win today. One wonders how he will dance when the music’s no longer to his liking.

Follow Jack on Twitter @BlackburnJA

Is David Cameron jumping the Tory electoral gun on welfare reform?

David Cowan 10.16am

Occasionally, among the static noise of 24-hour news, there comes a speech that matters. Yesterday’s by David Cameron, on welfare reform, was one of them.

The Government has already made good progress towards a better welfare state with the Universal Credit, Work Programme and the £26,000 benefits cap. But we now know that the Prime Minister and Conservative ministers have only just begun.

David Cameron is hitting back against the “entitlement culture”, which has gravely undermined a sense of “collective responsibility” that used to be so strong. It is at the heart of the ‘big society’ project to rejuvenate civil society. It is also absolutely spot on. If the state constantly intervenes in our lives instead of allowing us to live as individuals and communities, taking responsibility for our own actions, then it creates a client state of automatons.

There is already a ‘welfare gap’ between those who choose not to work and those who work and save for their family’s future. This is not because everyone on benefits is workshy but because of the perverse incentives produced by an overcomplicated system which simply isn’t working.

David Cameron is entering a potentially transformative phase in his premiership. This is not the end of ‘compassionate conservatism’, rather it is a reaffirmation of it. Instead of the lazy assumption that poverty is a problem solved by income redistribution, we are offered a more nuanced understanding. Mr Cameron highlighted the real causes of poverty, such as drug addiction, family breakdown, poor education and debt. Most importantly, he articulated the most effective solution to the problem:

“Compassion isn’t measured out in benefit cheques - it’s in the chances you give people…the chance to get a job, to get on, to get that sense of achievement that only comes from doing a hard day’s work for a proper day’s pay.

That’s what our reforms are all about. Transforming lives. Helping people walk taller.”

Elsewhere in the speech, the ‘Wisconsin model’ established during President Clinton’s administration in the US offered some inspiration: it proposes a two-year time limit on benefits, and for people receiving benefits to carry out full-time community work.

Mr Cameron also spoke about how couples on benefits were having children they obviously could not afford without state support. He proposed that income support should be stopped and additional child benefit limited for families with more than three children. Tougher measures on housing were also mooted, such as lowering the housing benefit cap further and stopping it completely for under-25s.

Deeper cuts to welfare budgets should not come as a surprise. George Osborne has already announced, in last year’s Autumn Statement, two more years of cuts and, in his Budget speech this year, the need for £10 billion of further savings from welfare by 2016 (to be outlined in the next Spending Review).

Political considerations are crucial. Downing Street’s director of strategy, Andrew Cooper, is largely responsible for the policy - his polling research showing that the benefit cap was among the Government’s more popular policies. It can prove how welfare reform is a ‘wedge issue’ on which both the Lib Dems and Labour are viewed as out of touch with the ‘striving classes’. Tougher welfare reform has now become the centrepiece of Conservative differentiation.

David Cameron has crafted a long-term vision for welfare reform that extends beyond this Parliament and establishes the groundwork for the Conservative party’s general election campaign in 2015. Undoubtedly his thinking his correct and needed but it should be some cause for concern that the coalition partners are distancing themselves to such an extent three years out from that election. The coalition needs a renewed unifying mission that goes beyond deficit reduction. A new Coalition Agreement, formulated by people such as David Laws, is what is needed now, not ‘differentiation’.

Mr Cameron’s speech is precisely what the Conservatives need to help them win in 2015. But it may have come a bit too early.

Follow David on Twitter @david_cowan

The financial and Eurozone crises have changed the face of politics forever

Sara Benwell 6.45am

Economic policy has always been important in politics, and people have always cared about fiscal policies that affect them directly, but not such a long time ago broader economic strategy only made up a small percentage of the issues that mattered when people decided who to vote for.

Essentially, voters cared if their taxes were going up, but when it came to broader economic strategy the issues were sidelined compared to other policies that had more obvious effects on people’s lives. Moreover, much of the banking world and financial terminology remained a complete mystery to the majority of the electorate, so as long as things were going well, economic policy was seen to be less important. Everyone presumed that the government and the bankers knew what they were doing.

Then came recession and the onset of the Eurozone crisis - and everything changed.

Now more people have a better working understanding of finance. Almost everybody I meet has an opinion about Greece, about Spain, about whether the Eurozone will break up and most importantly about whether or not the Government is doing the right thing to deal with the financial crisis or whether now is the right time for a credible plan B, or even C.

People don’t merely care about the areas of policy that effect them; they now care about the broader economic strategy. The space allocated to business and financial news - not just in the broadsheets but also in the tabloids - is increasing and is reflective of a growing public interest. These days it’s rare you’ll see any business stories in the national press that don’t have a direct link to finance and the economic situation; more often the stories will reflect job creation or losses, financial results, or economic indicators.

While the economic crisis is clearly not a good thing, it’s arguable that the increase in public knowledge and awareness has to be the silver lining to the debt crisis cloud. How many people fifteen years ago knew about monetary policy decisions, about inflation and about quantitative easing, let alone had a good working understanding of these terms as well as an opinion on them? Wider comprehension has to be a good thing.

There has also been a shift towards people wanting their financial institutions and their government to be held accountable. Now that everybody has seen the impact of the poor financial policies of the last labour governments and the problems that can arise when the bankers are given a free rein with little or no fear of retribution, there is an increasing focus on making sure that somewhere somebody is held responsible.

This has been reflected by the recent ‘shareholder spring’. While I think this is an exaggeration, and the term is used too widely and too often, there is no denying that the recent spate of chief executives like Sir Martin Sorrell being denied their bonuses would have been unthinkable a few years ago and reflects growing popular demand for more accountability in the business world.

Furthermore, policies like the ring-fencing of the banks, which I have written about here before, illustrate a move by the Government to introduce financial legislation designed to protect the electorate. This policy has recently been watered down, but that doesn’t change the fact that political parties have recognised the importance of bringing in policies to ensure that an increasingly aware voting public are sheltered from having to bail out the banks once more.

One can quite easily argue that the Coalition will stand or fall on the success of its economic policies. And it is increasingly clear that you cannot spend your way out of a recession, despite what the Labour party might claim.

So the question confronting us now is whether the Coalition Government has enough time left for its economic policy to come good, or whether ministers need to be considering a new plan.

Rest assured that whatever the answers to those questions, the British public is no longer ignorant about economics. And if the Coalition partners, particularly the Conservative party, wants to win the next election, they shall need to prove the credibility of their economic strategy.

Follow Sara on Twitter @sarabenwell

The UK could learn from Turkey

Alexander Pannett 10.40am

As the chaos of Europe continues unabated and dangerous economic winds lap at Britain’s shores, I recently decided to escape all the incessant doom and gloom and head to Istanbul for a delightful city break. 

Rich with history and a modern dynamic energy that draws comparisons with London, the Queen of Cities is a magnificent testimony to the plurality of dreams that humans can envisage. 

Situated on the Bosphorus, Istanbul is the only city in the world that bestrides two continents.  It is also the only city to have been the capital of two distinct, successive empires, Byzantine and Ottomon, that both dominated their respective faiths of Christianity and Islam. 

Modern trams intersperse ancient buildings as this teeming city of 15 million continues to attract merchants and talents from throughout Asia and Europe, much as it did a thousand years ago when it was known as Constantinople. 

Turkey is similar to the UK in many ways. Situated on the periphery of Europe, it acts as a conduit for trade, energy, migration and ideas into Europe from other major economies.  It is a multi-ethnic country with an imperial past containing Turks, Greeks, Armenians and Kurds. It sees itself as a staunch ally of the US and a leading member of NATO. It is also outside the Eurozone. 

Unlike the UK, the Turkish economy is in rude health. Figures released on 2 April  showed that Turkey’s GDP rose by 8.5% in 2011 after a 9% increase in 2010. According to a survey by Forbes magazine, Istanbul, Turkey’s financial capital, had a total of 28 billionaires as of March 2010 (down from 34 in 2008), ranking 4th in the world behind New York City (60 billionaires), Moscow (50 billionaires), and London (32 billionaires). 

Whilst the global financial crisis has affected Turkey, with its current account deficit averaging 10% of GDP last year and inflation at 10.4% in March, it has responded to the downturn much better than most across the world. It was one of a few countries that actually saw its credit rating upgraded during the crisis. 

The Economist has commented: 

Turkey has weathered the credit crunch better than other emerging economies. Partly thanks to tough regulation, not a single Turkish bank has gone under. That is also because, unlike many Western banks, they have few toxic assets and limited mortgage exposure. So the government has not had to divert public money into rescuing banks. 

For these reasons Turkey can offer some important lessons to the UK in how to take advantage of its geostrategic position between Europe and Asia, just as London lies between the US and Europe geographically, and between Asia and the US temporally.

Turkey has looked to Europe for much of its economic trade, in 2005 59% of exports and 51% of imports were with the European Union. But it has also diversified, looking at economies from wider afield, especially Russia and Japan but also emerging markets in central and eastern Asia. Considering that by 2015, 90% of the world’s trade will be generated outside Europe, this diversification seems eminently sensible. 

Turkey has also not been a poodle to US foreign policy. It refused to allow its territory to be used as a staging post for the Iraq invasion and has pursued a doggedly independent approach to its Kurdish insurgency and relations with the wider Middle East. 

Whilst there are still some worrying problems in Turkey, with reported human rights abuses, an overly political military and susceptibility to erratic international capital flow, to name but a few, the future looks much brighter in Anatolia than it does in other peripheral European nations. 

The UK should learn from Turkey’s courting of both Europe and emerging markets to boost its growing economy. It should take heart from what can be achieved economically by staying outside of the Eurozone and that it pays to take a more independent approach to foreign policy that is in line with core strategic interests. 

Both countries have a long history behind them and both will need to look away from Europe and towards the wider world to ensure a prosperous future lies ahead.

Follow Alexander on Twitter @alpannett

PMQs review: A muttering idiot of a draw

Jack Blackburn 3.45pm

The last Prime Minister’s Questions for three weeks before a joint Jubilee and Whitsun recess was a distinctly bizarre scoreless draw.

It didn’t so much resemble the two most senior politicians in the land debating matters of policy, as it did two angry siblings who simply weren’t listening to each other. Oh, and there was an irritating cousin thrown into the mix.

Edward Miliband’s tactic today was divide and rule. It is one we can expect to see more of over the coming months. Seeking to exploit the evident antagonism between the Business Secretary and Adrian Beecroft, author of this week’s controversial report on employment reform, the Leader of the Opposition set about asking where the Prime Minister stood.

This strategy is brazen but flawed, not least because all the front bench Lib Dems were strangely absent, thereby not allowing for television shots of awkward Lib Dems.

However, Mr Cameron avoided fulsomely embracing the report, suggesting that some recommendations would be taken and others would not, before the major exchange descended into an unstructured melee.

Edward tried to score points on, well, just about anything: Hunt, Coulson, growth, tax cuts for millionaires -  they were all there, culminating in his claim that “the nasty party is back”. Dave started banging on about the trade unions influence on Labour policy. All of the questions and the answers seem to have been decided quite some time before the session. It was a total damp squib.

The meat of the session actually took place after the Leader of the Opposition had sat down. The Prime Minister was asked about the ECHR’s ruling on voting rights for prisoners. The Prime Minister said he would stand for the sovereignty of Parliament and his belief that going to prison meant you lost certain rights, including the right to vote. This is a story that shall keep on rolling.

However, the headlines were stolen by that irritating cousin, namely Ed Balls. He repeatedly asked the Prime Minister how many glasses of wine he’d had, and needled the Flashman in Dave, as is his desire. Finally, by now having “we’re in recession” chanted at him by Mr Balls, Dave could take no more and Flashman flipped. He described the Shadow Chancellor as a “muttering idiot”, causing uproar in the chamber.

Succumbing to goading as such an easy thing to do. It is also easy to wind someone up. However, both these important public figures should not be doing it. Mr Cameron was forced to withdraw his “unparliamenatry” comment. Mr Balls is not subject to sanction. Speaker Bercow, of the pseudo-Headmasterly air, should perhaps get in touch with that instinct now, because these two schoolboys could use some discipline.

Follow Jack on Twitter @BlackburnJA