AS WITH municipal buses, so with big economic actions: you wait an age for something to happen and suddenly three come all at once.
It is a common error to assume from a UK perspective that the world waits on every move from Downing Street and that financial market behaviour is a reflection of UK government decisions.
It is – up to a very limited point. This week’s long-awaited Cabinet reshuffle, combined with a re-statement of the government’s resolve to push for changes in the UK planning regime to speed up infrastructure projects, have been well flagged. They are unlikely to have had a major impact on bond or equity markets.
And in truth, it is not these that will prove the determining event for the UK economy. It is external events over the next two weeks, well away from the Westminster political stage, that will have a greater impact on our prospects.
We have now entered a fortnight in which the words “whatever it takes” will be put to the severest test. The words “whatever it takes” to save the Euro formed the firm public declaration made by the President of the European Central Bank Mario Draghi (pictured) almost a month ago.
Financial markets in Europe and America have placed great store by these words and their implication that, despite heavy opposing fire from the German Bundesbank, the ECB will embark on an open-ended bond buying programme that could bring immediate relief to deeply troubled sovereign debt markets.
Spanish and Italian government debt markets have rallied, bringing down the yields on bonds from their stratospheric highs. And equity markets have bravely held up in the face of bleak data.
News from the ECB will be keenly awaited in Britain, for Euro zone crisis news has severely depressed business confidence for the past 18 months and more. And it has also dented consumer confidence as worries have resurfaced about the health and resilience of Britain’s banks in the event of a full scale Euro crisis.
UK Cabinet reshuffles may come and go, and the prime minister may utter pious words (once more) about reforming the planning system. But it is a defusing of the Euro crisis that would provide by far the bigger boost to confidence - not only across the Euro zone but also here in the UK. Now Mr Draghi has to prove he is as good as his word.
Markets are keenly awaiting Thursday’s meeting of the ECB when details of the programme for bond market intervention is due to be announced. And it is on these that the credibility of Mr Draghi’s resolve will be judged. Any indication that the ECB has “bottled it” would be very bad news indeed for markets and for business sentiment across the continent and beyond.
Also on Thursday comes the outcome of the latest deliberations of the Bank of England’s Monetary Policy Committee. A further burst of QE still seems likely by the year-end, possibly as soon as this week. Remember that it was barely two weeks ago that the Bank slashed its forecast for UK economic growth this year to zero. But yesterday’s better than expected UK manufacturing data may persuade the MPC to hold off for another month.
A week today (Wednesday September 12) the German Constitutional Court will pronounce on whether the European Stability Mechanism (ESM) arrangements are legal. Then, the following day the Open Markets Committee of the US Federal Reserve meets to decide on further quantitative easing. Chairman Ben Bernanke was inscrutably balanced in his remarks at the weekend. He appeared to indicate support for further QE, arguing that output and employment would have been lower without it (an assertion difficult to prove) without incurring a burst of inflation.
The message seems to be that if economic data warrant it, further resort to QE should not come as a surprise. And if there is no immediate evidence of an upturn in the labour market where recent figures have been very disappointing, the QE button is likely to be pressed. Note Bernanke’s comment: “unless the economy begins to grow more quickly than it has recently, the unemployment rate is likely to remain far above levels consistent with maximum employment for some time.” So the latest non-farm payrolls data – America’s key labour market monitor – due on Friday this week may well prove critical in the Fed’s decision.
So: a busy fortnight all in all, with external events that will have a bigger impact on our prospects than who sits where round the Cabinet table.