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This Week In The Economy: UK PM Faces Revolt Over Brexit Deal, Eurozone Growth Woes, US Banks Easing Standards To Compete For Business

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Tough Road Ahead For UK PM As Brexit Deal Reached With EU

This week the UK announced it had reached a preliminary deal with the European Commission on its withdrawal from the EU. The draft agreement covers issues such as how much money the UK will pay to the EU, a 21-month transition period after Brexit day on March 29, 2019, and commitments on the rights of EU citizens in the UK and UK citizens living in the EU. The agreement does not cover trade, as that will be dealt with during the transition period.

While May’s cabinet initially signed off on the agreement, the transition period, during which “the EU will treat the UK as if it were a Member State, with the exception of participation in the EU institutions and governance structures,” sparked a revolt among hardliners in her own party — resulting in the resignation of two cabinet members (including chief Brexit negotiator Dominic Raab) and the submission of letters forcing a ‘no confidence vote’ next week.

So what happens next? Assuming May survives the vote next week and talks don’t have to go back to square one, the EU heads of state will review and vote on the draft deal November 25, and then — more importantly — the UK parliament will give its thumbs up or disapproval of the agreement at a yet-to-be determined date in December.

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Checking In On The UK Economy…

On the inflation front, consumer prices — including owner occupiers’ housing costs — was up 2.2% in October 2018 compared to a year ago, unchanged from September 2018. Excluding housing costs, the Consumer Prices Index 12-month rate was 2.4% in October 2018, also unchanged from September 2018.

The Bank of England has a 2% inflation target, and the fact inflation readings are coming in steadily above that level means the central bank will likely resume interest rate hikes once the uncertainty over Brexit and its likely impact on the economy has passed.

Eurozone Recap — Slowing Economic Activity, ECB President Issues Warning On Trade-Related Risks To Growth

European Central Bank President Mario Draghi agreed in a speech Friday that, “we have recently seen a loss in growth momentum.” He blamed the temporary disruption in car production in Germany due to new emission standards, as well as weaker trade growth.

While the slowdown in global trade might be momentary, Draghi warned it could become long-lasting “if trade uncertainty rises and dampens euro area export performance, in particular owing to protectionism.”

The second condition would be if uncertainty among businesses about external demand spills over into domestic demand through confidence and investment channels.

“For now, there is little tangible evidence that the moderation in growth has affected business investment. But there is some evidence that those euro area firms that are most likely to be affected by proposed tariffs have reduced their rate of capital spending. Moreover, the slowdown in imports has particularly affected capital and intermediate goods, which might signal that firms are scaling back their investment decisions.” — ECB President Mario Draghi

In The United States — Fed Chair Confident On Economic Outlook, Banks Easing Loan Standards

He did warn, however, that the U.S. economy could face headwinds in the coming year from slower growth elsewhere in the global economy, the receding impact of the 2017 tax cuts law (combined with the surge in government spending) and the expected impact of interest rate increases by the Fed.

Meanwhile a separate report from the Fed shows many banks are watering down their standards for loans to businesses and households — spurred by the stronger economy and fierce competition for customers.

The Senior Loan Officer Opinion Survey said banks eased their standards and terms for commercial and industrial (C&I) loans even as they witnessed weaker demand for such loans on balance. The same was true in terms of mortgage lending, with banks again reporting a lowering of standards on most categories of residential real estate loans while experiencing weaker demand for such loans.

“ All domestic banks that reportedly eased standards or terms on C&I loans over the past three months cited increased competition from other lenders as an important reason for banks’ easing their standards or terms. In addition, significant net fractions of banks indicated that a more favorable or less uncertain economic outlook and an increased tolerance for risk were important reasons for banks’ easing.” — Fed Survey

Japan’s Economy Contracts As Trade Wars Bite

A devastating earthquake and typhoon were among the series of disasters to hit Japan this year, prompting the bigger than expected contraction.

Mexico Central Bank Hikes Rates To Almost 10-Year High

Fueled mostly by investors’ concerns regarding the incoming administration, as well as a subsequent move by rating agencies to downgrade Mexico’s sovereign risk outlook from stable to negative, the central bank warned that: “The most relevant is that the peso exchange rate may continue to be subject to pressures stemming from higher external interest rates and other external and domestic factors.”

Written by

Founder — SW4 Insights. Public policy junkie and Central Bank Watcher. Recovering journalist and former Senior Director at Hamilton Place Strategies

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