Infrastructure investment boosts global economies claims new report

BY Fraser Tennant

A large-scale investment in infrastructure is the answer to the stumbling economic growth rates in many large economies, according to PwC’s new ‘Global Economy Watch’ report.

This stumbling growth or “sizable negative output gaps” identified by PwC provides a snapshot of the amount of spare capacity in an economy by estimating how close it operates to its potential level of output. Moreover, of the G7 group of countries, only the UK and Germany are anywhere near to closing the gap, while Italy is furthest adrift, reveals PwC.

“We don’t expect this to change soon, since our main scenario sees global growth of around 2.5 to 3 percent this year, the fifth year of below trend growth measured in market exchange rate terms," confirms Richard Boxshall, a senior economist at PwC. “The UK saw growth slow to a slightly-below-trend rate of 0.4 percent in the first three months of 2016, while the US grew at a lethargic rate of 0.1 percent quarter-on-quarter.

The answer, claims PwC, is to boost growth rates by investing in infrastructure – a strategy that the professional services firm claims would boost aggregate demand through increased construction activity and employment in the short-term and increase the potential supply capacity of an economy in the long-term.

To this end, PwC has set out four key investment principles for policymakers to utilise when deciding where to invest: (i) ensure it meets a need, identifying current and future needs, supplementing the base case analysis with a range of scenarios including optimistic and pessimistic cases; (ii) ensure consistency with other objectives, including social and environmental as well as economic goals.; (iii) ensure the numbers add up, as governments with a relatively low net debt position and healthy public finances (e.g., Germany and Canada) can boost aggregate demand/long-term supply capacity via infrastructure-led programmes; and (iv) ensure it will benefit the wider economy, factoring in both the long-term effects as well as the direct and indirect impacts.

“This type of investment is once again being touted as the key to unlock our low growth environment – but the effectiveness of this policy will ultimately depend on how many shovel-ready projects in different economies meet the principles we’ve outlined," concludes Mr Boxshall.

PwC’s Global Economy Watch is a monthly publication which examines the trends and issues that are affecting the global economy, detailing the latest economic projections for the world’s leading economies.

Report: Global Economy Watch

Brexit impact on the financial services sector

BY Richard Summerfield

As 2016 progresses, the UK is heading into a period of doubt around its membership in the EU. The June referendum on Britain’s place in the bloc is approaching, and the only certainty is that no one is certain what exactly will happen should the country opt to leave.

In the latest in a number of papers concerning the referendum, TheCityUK and PwC have teamed up to present a report detailing the potential impact of a ‘leave’ vote on the UK’s financial services sector. Given the country’s reliance on the financial services space as a cornerstone of the national economy, the report does not make for pleasant reading.

According to the report, 'Leaving the EU: implications for the UK financial services sector', Britain could lose up to 100,000 jobs in the financial services space by 2020. Brexit could also reduce the sector's contribution to the national economy by up to £12bn.

The report echoes claims made by PwC in a paper published in March. Chris Cummings, chief executive of TheCityUK, said “Major firms from across the world come to London to access Europe’s single market, bringing with them jobs and investment. While Brexit may not be ruinous for the UK economy, it does risk damaging the UK-based financial services sector, particularly over the short term, delaying investment decisions and reducing activity. It also threatens the overall competitiveness of the UK as a place to do business.”

It is this suggestion of delaying investment decisions and reducing activity which may be most damaging to the financial service industry and London’s position as a global economics hub. Will foreign firms want to maintain a ‘European’ presence in a country outside of the EU?

Major US firms Goldman Sachs and JPMorgan have already issued warnings about the potential impact of a Brexit on their UK operations. "We believe that a key risk to London retaining its status as a financial hub is an exit by the UK from the EU. In common with financial institutions across the City, our ability to provide services to clients and engage in investment activities throughout Europe is dependent on the passport that London-based firms enjoy to operate on a cross-border basis within the Union. If the UK leaves, it is likely that the passport will no longer be available, thereby forcing firms that wish to access EU markets to move their operations to within those markets", the American firms told the Parliamentary Commission on Banking Standards.

TheCityUK and PwC report goes onto suggest that the financial sector would still grow should the UK leave the EU, however the value of the sector’s activity would be lower in 2030 than it would be should the country remain inside the EU.

Report: Leaving the EU: implication for the UK financial services sector

Optimism has fallen: new survey highlights sharp slump in financial services sentiment

BY Fraser Tennant

Optimism in the financial services sector has slumped alarmingly in the past five years, with firms citing market instability, sector competition and macroeconomic uncertainty as their top three challenges, according to the new CBI/PwC Financial Services Survey published this week.

The survey, a quarterly analysis of 104 financial services firms, reveals that banking and investment management respondents in particular had seen the sharpest slump in sentiment, while optimism across building societies and in the insurance sector was found to be broadly flat.

Drilling down, the survey shows that optimism in the financial services sector has fallen at its fastest pace for over four years, with 14 percent of firms more optimistic, but 35 percent less so, giving a balance of minus 21 percent. In comparison, the balance was 24 percent in December 2011.

“Concerns over China and a volatile start to the year for markets, alongside uncertainty about a possible Brexit, have created a perfect storm to dampen optimism in financial services,” said Rain Newton-Smith, the director for economics at the CBI. “As we know from talking to CBI members, now that the referendum date has been set some investment decisions have been put on hold by some firms, though this is not widespread.

“Investment intentions for IT remain resilient, but spending plans are being scaled back in other areas. Investments are increasingly motivated by the need to promote efficiency, while uncertainty about demand appears to be holding additional investment spending back.”

However, despite the findings, the survey does indicate that business volumes have continued to expand at a solid pace, and profitability has improved, albeit at the slowest pace for two years. Overall, business volumes rose at a decent pace, with 44 percent of firms stating that volumes were up, 18 percent saying they were down, giving a balance of +26 percent.

The survey also notes an increase in staffing levels in financial services during the last quarter, though this uptick is expected to flatline in the next three months, with insurance and building society sector staff increases being offset by losses within the banking fraternity.

“The lack of opportunities to generate revenue has shifted the focus of financial services companies to how they make their business models more efficient or effective - no easy task in such an unpredictable climate,” said Kevin Burrowes, UK financial services leader at PwC. “Despite the pessimistic mood in the sector, it is very encouraging to see that many financial services organisations are planning to up their game around talent attraction and diversity."

News: ‘Perfect storm’ of events dampens optimism among financial services firms

Landmark year in global renewable energy investment

BY Richard Summerfield

Global investment in renewable energy reached record levels in 2015, according to a new report from the United Nations.

Renewable energy investment climbed to $286bn last year, a 3 percent increase on the previous record set in 2011, and more than double the $130bn invested in coal and gas power stations over the same period.

The report – Global Trends in Renewable Energy Investment 2016 – is the tenth edition of the UN Environment Program’s annual publication and has been launched by the Frankfurt School-UNEP Collaborating Centre for Climate & Sustainable Energy Finance and Bloomberg New Energy Finance (BNEF).

“Global investment in renewables capacity hit a new record in 2015, far outpacing that in fossil fuel generating capacity despite falling oil, gas and coal prices,” said Michael Liebreich, chairman of the advisory board at BNEF. “It has broadened out to a wider and wider array of developing countries, helped by sharply reduced costs and by the benefits of local power production over reliance on imported commodities.”

One of the most notable features of the of the UN backed report is that while global investment in solar, wind and other renewable sources of energy has climbed considerably, for the first time ever the developing world accounted for the majority of investments. According to UNEP’s data, renewable investment in developing countries climbed 19 percent to $156bn in 2015, $103bn of which was invested in China alone. “Renewables are becoming ever more central to our low-carbon lifestyles, and the record-setting investments in 2015 are further proof of this trend,” said UNEP Executive Director Achim Steiner.

However, the growth in developing economy investment contrasts with a fall in similar investment in the developed world. Though US investments rose 19 percent to $44bn, investments in developed countries fell 8 percent to $130bn. Investment in Europe was down 21 percent, from $62bn in 2014 to $48.8bn in 2015, the continent’s lowest figure for nine years, despite record investments in offshore wind projects. Japanese investment in renewable energy was much the same as the previous year, at $36.2bn.

There has been good progress made in renewable energy investment and it is clear that some structural changes to the energy space are underway; yet there is still a great deal of work to be done. Renewables still only accounted for one-tenth of global power generation, the majority of which comes from coal and natural gas.

Report: Global Trends in Renewable Energy Investment 2016

“No hard landing” promised as China unveils 5-year economic growth plan

BY Fraser Tennant

A 2016 growth target of between 6.5 and 7 percent and a major reduction in unemployment are the main aims of China’s new Five-Year Plan – the achievement of which the government hopes will help address the country’s deepening economic problems.

Unveiled by prime minister Li Keqiang during the opening of China's 12-day annual national parliament on 5 March, the Five-Year Plan (the country’s thirteenth) is essentially a roadmap for the nation’s development from 2016 to 2020 and will be a “tough battle” to achieve, said Mr Keqiang, requiring China to face “more and greater difficulties".

Further key components of the Plan include the requirement for China to cap its energy consumption (for the first time ever), tackle rising inflation, and introduce an effective job creation programme. However, when announcing the Plan at the opening session of the legislature, the prime minister was noticeably less forthcoming with details of how the targets contained in the Five-Year-Plan will actually be met.

Also in the Chinese government’s sights is the restructuring of inefficient industries, in particular dealing with zombie companies (known as Jiangshi in China) – organisations that are unable to pay their bills and are reliant on government assistance to meet their financial obligations.

Perhaps inevitably, there has been much criticism of the Plan from many quarters with economists and investors raising concerns that the fiscal target outlined (a fiscal deficit equivalent to 3 percent of GDP) is not ‘aggressive’ enough. Critics have also said that the national growth target itself may cause problems, as under pressure central government officials may be tempted to obscure or even falsify data.  

In response, Xu Shaoshi, head of the National Development and Reform Commission (NDRC), said that the government wanted to improve the efficiency of its investments with a strategy of more targeted spending being adopted. "China will absolutely not experience a hard landing," said Mr Shaoshi at the opening of parliament. “These predictions of a hard landing are destined to come to nothing."

With China being the only major world economy (the second biggest) to announce an annual growth target, the pressure is now on the Chinese government to deliver its extensive economic reform programme to guarantee sustainable growth.

News: Economic reforms are crucial if China is to meet its growth target