WASHINGTON: There was a moment last week when Philip Hammond thought he would not make it to Washington. Priti Patel, the Secretary of State for International Development, had already cancelled her appearance at the International Monetary Fund and World Bank spring meetings, and with the Chancellor of the Exchequer part of the inner circle who knew Theresa May would call a snap general election, he too had a difficult decision.
The choice, he told an audience at the British Embassy that included Steven Mnuchin, US Treasury Secretary, and Mark Carney, Governor of the Bank of England, was between “endless attrition on the shoe leather” knocking on doors in his constituency, Runnymede and Weybridge, or rubbing shoulders with the global elite in Washington.
In the end it was a “tough call”, he told the chortling crowd, though the decision to board a plane to the US instead of a train to Surrey was also met by some harsh reality. Hammond said there was whisky in his room when he stayed in the British embassy in as foreign secretary. This time, the booze was replaced by mineral water. The man in charge of the purse strings in austerity Britain was forced to practise what he preached.
But there was also purpose to the Chancellor’s visit to Washington. He was here to discuss how to transform the recent economic growth spurt, including in the UK, into a lasting recovery felt by all, and also to sow the seeds of the future.
Mnuchin’s presence at the Friday night event demonstrated Britain’s intent to secure a trade deal with the world’s biggest economy. In a room full of financiers, bankers and businessmen, Hammond described the US as the UK’s “most important relationship by far”. The two countries would build on the “many areas of collaboration that we already have that bind us,” the Chancellor said.
Picking up speed
The conclusion after a week of meetings was clear: the global recovery is gathering momentum. The IMF edged up its forecast for global growth this year to 3.5 per cent, from 3.4 per cent in January. The warning last year by Christine Lagarde, the IMF’s managing director, of a “new mediocre” was no longer in focus. For Lagarde now, spring was in the air “and in the economy as well”.
Franziska Ohnsorge, lead economist at the World Bank, says it is a familiar pattern.
“People are always depressed around [the World Economic Forum in] Davos in January, but then they leave feeling a bit better. By the spring the mood usually picks up,” she says.
Ohnsorge has become used to false dawns, but believes this time it is different. “People are really feeling this,” she says, pointing at a page in the World Bank’s latest Global Economic Prospects showing a 2017 global growth projection of 2.7 per cent, which if realised, would be significant strengthening compared with growth of 2.3 per cent in 2016.
“There is clearly a sense that the global economy turned a corner last year,” she says. “There is finally light at the end of the tunnel.”
Growth is broad-based. Brazil and Russia are emerging from deep recessions, while the Chinese economy grew at a faster-than-expected pace in the first quarter of 2017. Growth in the Eurozone is also picking up, with no major economy expected to contract this year.
The question, Ohnsorge says, is what does growth today mean for economic prospects tomorrow? “Is it really light at the end of the tunnel, or is the light still far away?”
For Hammond, who welcomed the IMF’s significant upgrade to UK growth this week, there are also implications for Brexit. Many believe a strengthening economy, both globally and in the EU, is likely to make Brussels a more amicable negotiator.
It is for this reason the next hurdle for Downing Street is not in Westminster or Holyrood, but Paris. A victory in the second round of the French presidential election on May 7 for anti-EU candidates Marine Le Pen, the leader of the Front National, or the left-wing Jean-Luc Melenchon, would shake the political project to its core. This would spell bad news for British hopes of getting a favourable Brexit deal.
One top official says: “The EU’s number one objective is always to keep the bloc together. If anything threatens the union, then concessions on Brexit become a danger, because it sends a flashing light that others could do the same. If an extremist wins, I am sure the EU will go into a defensive crouch.”
Remarkable outcome
It is late on Thursday evening, and Vitor Gaspar, the IMF’s fiscal chief, is anxious. He has been issuing warnings all week about global debt and low productivity growth, but that is not why he is concerned. His wife has just landed at Dulles airport from Portugal, and he is wondering if he will be able to leave work on time to meet her. Gaspar, like many of his colleagues, has been surprised at the resilience of the UK economy in the wake of the Brexit vote.
For example, he says, the decision to leave the EU had very little impact on public borrowing. In fact, the out-turn for this financial year, confirmed this week, is likely to be closer to the Office for Budget Responsibility’s forecast in March 2016 than the prediction made by the watchdog last November.
“The way we see it, it’s quite remarkable that [borrowing] for the fiscal year 2016/17 came so close to what was in the initial plan,” Gaspar says. “You would not have guessed the recent political developments in the UK from the budget out-turn [the amount of public borrowing] if that’s the only thing that you knew.”
Gaspar also welcomes the “growth-friendly fiscal policy” adopted by the Tories. While there is still more austerity to come, Hammond is a Chancellor willing to borrow more to cushion the economy against shocks and boost living standards.
“The path for the budget balance has been revised going forward and it has been revised to make room for what the UK treasury calls high quality investment,” he says. “The idea is to improve the growth potential of the UK economy, and to make it more resilient in the context of Brexit.”
Gaspar also praises Hammond’s decision to move towards a borrowing target that adjusts for booms and busts in the economy. The IMF believes policymakers should fix the roof while the sun is shining so it can provide support when economic storms hit. Targeting a structural deficit of below 2 per cent of GDP by the start of the next decade instead of an overall budget deficit does exactly that, Gaspar says.
Hammond signalled last week that a Tory government led by Theresa May would move further away from the rigid framework set by his predecessor as Chancellor, George Osborne. Hammond set out in last year’s Autumn Statement a goal to post an absolute surplus “by the end of the next parliament”. This meant 2020 a week ago, but will soon mean 2022 if the Tories regain power.
While Hammond has said he still wants to eliminate public borrowing, it is likely that these nominal targets will be pushed further into the background. Gaspar says being flexible is a sensible move: “If you’re very sure that the economy is on a given path, and you believe that risks are really minor, you may want to have a nominal target because it’s a stronger commitment device. But if you’re facing a lot of uncertainty, then you shouldn’t, because the likelihood of you being able to meet such a nominal target is low, and then it serves no purpose.”
Returning to Ohnsorge’s question, Mark Carney said last week that the exuberance displayed by financial markets and survey data was not yet translating into solid investment. While there was a “much more positive outlook” on the global economy, Carney said: “There is still a hesitation about actually putting money to work, and the question is what will it take and how are various governments going to translate intention into action.
“That’s understandable, given what businesses have lived through over the past decade. So there is more upside to the global economy if we start to see policy uncertainty reduce and that enthusiasm translate into action,” the BoE governor said.
With another IMF meeting over, Hammond will soon be back on the campaign trail. In just under seven weeks, the UK is likely to elect another Tory government. But while some predictions are easy, Brexit is not. While the global economy may be headed firmly in one direction, Britain’s journey towards its new place in the world has only just begun.
— The Daily Telegraph
