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Will George’s marvellous medicine save UK plc?

Mar 27, 2012 at 12:44 pm in Market Commentary by City Insider

I WAS having breakfast at Franco’s in St James’s last week when I noticed the din from my fellow diners was louder than usual.  There wasn’t a spare table in the house and Jason, the affable maitre’d, told me they hadn’t been this busy for months. The reason? I suspect it had something to do with the top rate of tax coming down to 45p in the Budget – it makes it ever so much easier to pay those school fees.

The diners in Franco’s weren’t exactly breaking out the champagne, but it felt like there was a lighter mood across much of the business world following George Osborne’s speech last Wednesday.

The Chancellor was keen to get the message across that Britain is ‘back in business’ and corporation tax, as well as the rate for top earners, is going to be reduced. However, George handled the cutting back of pensioner’s allowance with as much tact as an elephant ice-skating – he and his well-paid advisors only have themselves to blame for the ‘Granny Tax’ headlines.

There were no nasty surprises when it came to the growth and fiscal forecasts, although there are some creeping concerns where the UK economy is concerned.

Weak data from the consumer sector has raised fears that the economy will only just scrape growth of about 0.1pc in the first quarter. Inflation also fell more slowly than expected in February to 3.4pc and economists tell me that trend could continue if heightened tensions in the Middle East cause a further spike in oil prices.

Low inflation promised to be the one piece of good news for the UK economy in 2012, but just three months in, Bank of England policymakers are already warning that it may not be below the 2pc target by the end of the year as they have predicted. That makes the prospect of more quantitative easing less likely.

Greece has also been put out of its misery since we last spoke, but for how long? Athens completed a debt swap with its private sector investors and in doing so secured a second bailout from its fellow eurozone members and the IMF. This is good news for the global financial system, but economists tell me that it’s unlikely to be the last time Greece goes cap in hand for funds.

In the world of commodities, it’s all about China.

Falling copper prices look probable over the next few weeks, but any hint of more QE from Ben Bernanke could reverse this. Copper is an economically sensitive metal because of its wide range of applications, so the prospect of more liquidity in the US will send the price higher.

In contrast, oil prices have remained high ahead of economic sanctions being imposed on Iran. Even Saudi Arabia’s plan to send 11 oil tankers to the US and talk about dipping into strategic reserves has failed to get the price to move much lower. Volatility at $100+ looks certain for some time.

Finally, Gold has wiped out almost all of its gains this year as the eurozone crisis eases and the dollar strengthens. However any weakening of the dollar after its recent strong run would be manna for the gold bugs, so watch this space.

That’s all for now as I have dinner with David Cameron. Until next time…

To give our clients a different and uniquely informed perspective on the financial markets, Capital Spreads introduces “The City Insider”, a fortnightly view from a City expert, with a senior network of influential bankers, investors, economists and analysts. The identity of the Insider is anonymous – and a closely guarded secret – in order to allow our expert to express forthright, personal views and to protect the identity of the City figures upon whose opinions the Insider draws.

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