Any other business

The next financial crisis is coming ‘with a vengeance’, says the expert. But when?

1 July 2017

9:00 AM

1 July 2017

9:00 AM

There’s a passage in Philip Larkin’s All What Jazz, the collection of his writings as the Daily Telegraph’s jazz critic, that imagines his typical readers. Husbands of ‘ageing and bitter wives they first seduced to Artie Shaw’s “Begin the Beguine”’ who take comfort from collections of ‘scratched coverless 78s in the attic’, they are ‘men whose first coronary is coming like Christmas’. The same sense of gloomy inevitability often pervades the so-called ‘dismal science’ of economic commentary, amplified by political uncertainty and traumatic events: the one thing we know for certain is that economic life is cyclical and that any run of benign signals can only ever be temporary. It’s only a matter of when and in what form the next downturn comes upon us, and of taking what steps we can to soften its impact. This week Claudio Borio of the Bank for International Settlements — the central bank of central banks — encapsulated this foreboding with a phrase almost as resonant as Larkin’s. The end of the current global economic expansion, he said, may turn out to be very like a repeat of the last one, barely a decade ago: ‘a financial boom gone wrong… with a vengeance’.

Introducing the BIS’s annual report —which opens, it must be said, with upbeat talk of ‘near-term prospects the best in a long time’ — he was assessing a catalogue of threats to global growth. These include a rise in protectionism, particularly from the United States; a massive build-up of debt in China and other emerging markets, such as Thailand; the continuing uptick of inflation; and the difficulty faced by central banks of nudging interest rates back towards ‘normal’ levels without tipping borrowers into trouble, discouraging business investment and flattening consumer spending.

As a matter of when rather than if, the question to be applied to the UK economy must be how these factors will intersect with the timetable of Brexit. The expansion phase of every cycle rarely lasts more than five years, and if you count the current one from early in this decade, a downturn is already overdue. We can’t do anything about headwinds from China, or the policies of Trump. The inflation bug is already with us, fed by the weakness of the pound. On the domestic front, Governor Carney signalled on Tuesday his concern that the card debt and car loan bubble could burst, and that higher-risk mortgage lending is also a renewed danger. Business confidence has been shaken by the election — and is highly unlikely to be improved by interim bulletins from the Brussels negotiating chamber, which could soon be a scene of extended hostile stalemate. On this analysis I’m guessing our economic coronary isn’t coming by this Christmas but — and I hope I’m wrong — it may well do so by Christmas 2018.

There’s a passage in Philip Larkin’s All What Jazz, the collection of his writings as the Daily Telegraph’s jazz critic, that imagines his typical readers. Husbands of ‘ageing and bitter wives they first seduced to Artie Shaw’s “Begin the Beguine”’ who take comfort from collections of ‘scratched coverless 78s in the attic’, they are ‘men whose first coronary is coming like Christmas’. The same sense of gloomy inevitability often pervades the so-called ‘dismal science’ of economic commentary, amplified by political uncertainty and traumatic events: the one thing we know for certain is that economic life is cyclical and that any run of benign signals can only ever be temporary. It’s only a matter of when and in what form the next downturn comes upon us, and of taking what steps we can to soften its impact. This week Claudio Borio of the Bank for International Settlements — the central bank of central banks — encapsulated this foreboding with a phrase almost as resonant as Larkin’s. The end of the current global economic expansion, he said, may turn out to be very like a repeat of the last one, barely a decade ago: ‘a financial boom gone wrong… with a vengeance’.

Introducing the BIS’s annual report —which opens, it must be said, with upbeat talk of ‘near-term prospects the best in a long time’ — he was assessing a catalogue of threats to global growth. These include a rise in protectionism, particularly from the United States; a massive build-up of debt in China and other emerging markets, such as Thailand; the continuing uptick of inflation; and the difficulty faced by central banks of nudging interest rates back towards ‘normal’ levels without tipping borrowers into trouble, discouraging business investment and flattening consumer spending.

As a matter of when rather than if, the question to be applied to the UK economy must be how these factors will intersect with the timetable of Brexit. The expansion phase of every cycle rarely lasts more than five years, and if you count the current one from early in this decade, a downturn is already overdue. We can’t do anything about headwinds from China, or the policies of Trump. The inflation bug is already with us, fed by the weakness of the pound. On the domestic front, Governor Carney signalled on Tuesday his concern that the card debt and car loan bubble could burst, and that higher-risk mortgage lending is also a renewed danger. Business confidence has been shaken by the election — and is highly unlikely to be improved by interim bulletins from the Brussels negotiating chamber, which could soon be a scene of extended hostile stalemate. On this analysis I’m guessing our economic coronary isn’t coming by this Christmas but — and I hope I’m wrong — it may well do so by Christmas 2018.

The vultures are back


The Co-op Bank is no longer for sale. Loss-making for five years, undercapitalised and reputationally damaged, it has been unable to find a buyer and has fallen back into the arms of the US ‘vulture fund’ managers who became its major investors when it was last rescued in 2014. They must have calculated that they will lose less if they inject more capital and hang in there, rather than see the bank wound down under Bank of England rules.

Could there be anyone more unsuitable than these hard-nosed New Yorkers to determine the fate of an institution that still (even if only 20 per cent owned by the Co-op parent group) presents itself as part of the beacon of kinder capitalism that is the Co-operative movement? Well yes, there probably could: the last potential buyer in the frame was Al Faisal Holding, a conglomerate from Qatar. Given my recent observations on the baleful influence of money from that part of the world, enough said.

Dignified success

What Walter Bagehot called the ‘dignified’ element of our constitutional structure seems to be working a lot more efficiently than the ‘efficient’ part these days. By that I mean not only that the Queen has set examples of quiet great-grandmotherly empathy by her visits to the survivors of the Manchester bomb and the Grenfell Tower fire, and of work-life balance by dashing from the dressed-down opening of Parliament to the dressed-up carriage parade at Royal Ascot; no politician can match the way she expresses the national mood in the set of her jaw and the choice of her hat. But I mean also that the business which supports her, the Crown Estate, has been showing a shining example of long-term stewardship.

The estate, which owns £12 billion worth of prime real estate in London and elsewhere, generated net income last year up 8 per cent to £329 million and reckons itself resiliently positioned for a Brexit-related ‘pause rather than a downturn’. Most of its profit goes to the Treasury, but 25 per cent of it makes up the Sovereign Grant which meets Royal Household expenses, recently increased from 15 per cent to cover the refurbishment of Buckingham Palace. Were it not for the monarchical connection, the estate would have been privatised years ago and the proceeds frittered on political follies; as it is, the royal show that is our consolation in troubled times is entirely funded by shrewd commercial management.

Two further points of note. The first is that as owner of the seabed around Britain’s coast, the estate makes £28 million a year from offshore windfarm leases: so if you’re flying over a turbine array on a windless day you can tell fellow passengers: ‘Well at least they’re feeding Her Majesty’s corgis.’ The second is that income from the Duchy of Cornwall, the separate estate that picks up the Prince of Wales’s bills, rose only 1.2 per cent last year, to £21 million. Weaker performance than the Crown Estate may reflect a more rural portfolio, but I suspect it also reflects the Prince’s uncommercial urge to dabble — and reminds us that the next executive chairman of the royal conglomerate is unlikely to prove as competent, in all sorts of ways, as the present incumbent.

The Co-op Bank is no longer for sale. Loss-making for five years, undercapitalised and reputationally damaged, it has been unable to find a buyer and has fallen back into the arms of the US ‘vulture fund’ managers who became its major investors when it was last rescued in 2014. They must have calculated that they will lose less if they inject more capital and hang in there, rather than see the bank wound down under Bank of England rules.

Could there be anyone more unsuitable than these hard-nosed New Yorkers to determine the fate of an institution that still (even if only 20 per cent owned by the Co-op parent group) presents itself as part of the beacon of kinder capitalism that is the Co-operative movement? Well yes, there probably could: the last potential buyer in the frame was Al Faisal Holding, a conglomerate from Qatar. Given my recent observations on the baleful influence of money from that part of the world, enough said.

Dignified success

What Walter Bagehot called the ‘dignified’ element of our constitutional structure seems to be working a lot more efficiently than the ‘efficient’ part these days. By that I mean not only that the Queen has set examples of quiet great-grandmotherly empathy by her visits to the survivors of the Manchester bomb and the Grenfell Tower fire, and of work-life balance by dashing from the dressed-down opening of Parliament to the dressed-up carriage parade at Royal Ascot; no politician can match the way she expresses the national mood in the set of her jaw and the choice of her hat. But I mean also that the business which supports her, the Crown Estate, has been showing a shining example of long-term stewardship.

The estate, which owns £12 billion worth of prime real estate in London and elsewhere, generated net income last year up 8 per cent to £329 million and reckons itself resiliently positioned for a Brexit-related ‘pause rather than a downturn’. Most of its profit goes to the Treasury, but 25 per cent of it makes up the Sovereign Grant which meets Royal Household expenses, recently increased from 15 per cent to cover the refurbishment of Buckingham Palace. Were it not for the monarchical connection, the estate would have been privatised years ago and the proceeds frittered on political follies; as it is, the royal show that is our consolation in troubled times is entirely funded by shrewd commercial management.

Two further points of note. The first is that as owner of the seabed around Britain’s coast, the estate makes £28 million a year from offshore windfarm leases: so if you’re flying over a turbine array on a windless day you can tell fellow passengers: ‘Well at least they’re feeding Her Majesty’s corgis.’ The second is that income from the Duchy of Cornwall, the separate estate that picks up the Prince of Wales’s bills, rose only 1.2 per cent last year, to £21 million. Weaker performance than the Crown Estate may reflect a more rural portfolio, but I suspect it also reflects the Prince’s uncommercial urge to dabble — and reminds us that the next executive chairman of the royal conglomerate is unlikely to prove as competent, in all sorts of ways, as the present incumbent.

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