The new age of austerity offers some upside

Ross Westgate
HINDSIGHT is a wonderful thing . Had we known, we could have saved ourselves a nine per cent loss on the FTSE since the beginning of May. At least the weather’s finally turned nice.

If only those politicians in Europe and the US could get a grip, I hear you say, we’d all be a better off.

They could even take a leaf out of Dave and Nick’s grand coalition, which is talking tough on the budget. That nice David Laws (you know, the ex-investment banker turned Lib Dem chief scrooge to the Treasury) need only welcome the age of austerity and already things look better. Our total borrowing for the last tax year is £13bn less than Alistair Darling forecast in March and the Debt Management Office received such strong demand for a 10-year gilt auction last week they could put up the price of UK government debt, an astonishing thought. Add in an expected upward revision to this week’s GDP figure because of higher business investment and the clouds have all drifted away. OK, so I might be clutching at straws – but just wait until 22 June, date of the emergency budget. I love the announcement of a good fiscal tightening and, funnily enough, so do the rating agencies. Britain might just be off the hook, for now at least. We can service our debt, policy looks good and the numbers are heading in the right direction.

Yet before we pour ourselves one more Pimm’s and relax, I do have a nagging feeling – and I don’t mean the Eurozone.

This latest selloff has really been a readjustment on forecasts of global economic growth. As Mike Lenhoff of Brewin Dolphin puts it, “the dollar bloc (notably the US and China) led the way in the recovery. With the rise in the dollar, a risk now is that the bloc’s contribution to the global upswing lessens and that this results in a loss of the earnings ‘momentum’ behind the rapid upward revisions to global earnings expectations”.

It’s notable how big a part commodities and basic resources have played in the falls since April. Although China has not raised interest rates it has been curbing bank lending and attempting to micromanage a cooling down of the economy. If you’ve priced Chinese growth at 8-10 per cent and we now get 6-8 per cent that has to put a squeeze on the whole Asia Pacific economy – and thereby hit global asset prices.

Ross Westgate co-hosts Worldwide Exchange daily on CNBC and also anchors Strictly Money --