Boris and Donald Stir up Stronger Political Headwinds
This week much of the news has been dominated by two political scandals; the court ruling that Boris Johnson acted unlawfully by proroguing parliament, and the developing news that Donald Trump tried to pressure Ukraine into investigating a political rival by withholding military aid. While both could turn out to be fatal for their perpetrators eventually, the immediate impact is surprisingly little. MPs have secured an extra couple of weeks back in parliament but they may not be able to do much with it. Likewise, in the US, Democrats and Republicans remain at loggerheads over impeachment.
While these developments are just part of the background now, they may yet snowball. Both leaders enjoy popular support among their base and have so far been immune to things that would have easily finished off their predecessors; it’s easy to see a line being crossed where that support evaporates. Given the signature policies of both leaders, Brexit and trade wars, this could have a massive impact on markets.
UK: Thomas Cook Collapses
Thomas Cook entered liquidation this week, immediately ceasing all activities and leaving approximately 155,000 people stranded abroad, leaving the government to help ATOL fly the holidaymakers back home. While the news came as a surprise to many, if you look at their recent track record, it’s a wonder they managed to stay afloat for so long. In a bid to stay ahead of a highly competitive market back in 2007 the 178-year travel provider entered a merger of equals with MyTravel. The problem was that MyTravel barely made a profit in the prior six years and didn’t generate the required revenue ultimately ending up with the group suffering heavy losses.
In 2011 with the internet revolution in full swing, Thomas Cook bought Co-op Travel saddling the company with 1200 stores. Within the same year, the company had a near death experience and needed short term funding which was provided but at high rates and its debt pile grew to £1.1bn. Over the last 8 years the company has paid out £1.2bn in interest.
US: Economy Grows at a Modest Pace
In the US figures for the second quarter paint a picture of a slowing economy propped up by consumer spending. The fall in business investment activity was revised from 1.1 per cent to 1.4 per cent indicating that the trade war continues to bite, and doubts are starting to set in as to how long consumer spending can stave off a recession. Overall GDP growth was at two per cent for the quarter.
However, not all the blame can be attributed to the trade war. Productivity, which is measured by the amount of goods and services produced against the number of hours worked, is also in decline. And given the labour market is tight, higher total output would have to be come via increasing the hours worked. Good luck telling the Americans that. Generally, a big spike in productivity tends to come from technological innovation like the transistor or the internet so unless we have another technological leap expect productivity rates to stay modest.
India: Government Cuts Corporate Tax Rates
India’s latest effort to combat sluggish economic growth this week was a cut to the basic corporate tax rates from 30 per cent to 22 per cent. The nation, which has lowered interest rates four times this year, will bring tax rates closer to the likes of China, UK and the US, with the aim of becoming more globally competitive and boosting its profile to foreign investors.
By complementing monetary policy changes with fiscal loosening, it is also hoped that consumers will spend more, taking advantage of reduced consumer goods costs and low rates. New manufacturing companies are set to reap the most from the reduced rates. Their corporate tax rate will shrink from 25 per cent to 15 per cent, but only if they incorporate the company at the start of October and commence production by the end of March 2023.
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