SO A LITTLE disappointing but in the end there was something for everyone in Friday’s GDP numbers. We looked for 0.4 per cent for the first quarter and got 0.2 per cent. You’d think that would be bad for Gordon Brown but he revelled in his line that this proved the recovery was fragile and you couldn’t risk it with the early cuts to public spending planned by the Conservatives. The opposition parties on the other hand could accuse the government of engineering a feeble economic effort.
The likelihood is these numbers will be revised up, the first estimate (out of three) takes account of only 40 per cent of the economy and distribution, hotels and restaurants were all affected by January snow. But 0.2 per cent is the number that will be taken into this week’s final leaders debate where for 90 minutes the economy will be centre stage. Not that I expect to learn anything more concrete about exactly how and where the various parties will make the spending cuts required to bring down the deficit. Of more importance is that it is David Cameron’s last chance to try and prevent a hung parliament, which – if you believe Ken Clarke – will be met with a terrible reaction from financial markets. But as more polls suggest just such an outcome, the more relaxed about it the gilt and sterling markets appear. There is of course no reason to believe a coalition government can’t present a credible economic plan. In Germany you’d be laughed at to even suggest it, but plenty out there – including the world’s biggest bond house Pimco – believe that investors are too sanguine.
I’m not sure sanguine is the right word. It may just be that uncertainty is so great, no one’s sure what the right risk reward trade is. Think about it; there’s less than two weeks to go and no one’s got a clue what’s going to happen. There might be a hung parliament in which no credible government emerges, so sterling and gilts are a big sell. Or the Conservatives might win a clear majority, in which case sterling and gilts are a big buy. Or it might be a working coalition in which case all bets are off. But it’s a huge gamble, so why bother, especially when there’s bigger fish to fry?
Government bonds and currencies are not a zero sum game. They must be valued in conjunction with each other and here we’re in a real battle of the uglies. The euro and Eurozone bonds are engulfed in the Greek crisis and US investors are eyeing up another huge week of Treasury issuance; $118bn worth of two, five and seven year notes with the ever present fear that one day, one of these auctions will fail. Troubled times indeed.
Ross Westgate hosts CNBC’s Strictly Money and Worldwide Exchange shows.