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| US prepares to hit the wall as reckless Trump undoes years of hard work | US prepares to hit the wall as reckless Trump undoes years of hard work |
| (12 days later) | |
| The accomplishments of a US president’s first year in office can be credited to his predecessor, at least where the economy is concerned. And Donald Trump was handed the best performing economy on the planet. All the tough decisions – to refinance the banks, rescue the car companies and deflate the real-estate bubble – had been made. The stock market was tearing along, setting records almost every week. | The accomplishments of a US president’s first year in office can be credited to his predecessor, at least where the economy is concerned. And Donald Trump was handed the best performing economy on the planet. All the tough decisions – to refinance the banks, rescue the car companies and deflate the real-estate bubble – had been made. The stock market was tearing along, setting records almost every week. |
| Trump gave this rising balloon extra air with $1tn of tax cuts. It was borrowed money, but no matter. The economy sailed along for another year and the stock market carried on rising. His plan was to win the midterm congressional elections and then persuade the Republican party to give him another $1tn, or as near to it as possible. | Trump gave this rising balloon extra air with $1tn of tax cuts. It was borrowed money, but no matter. The economy sailed along for another year and the stock market carried on rising. His plan was to win the midterm congressional elections and then persuade the Republican party to give him another $1tn, or as near to it as possible. |
| In other words, he would use another pile of borrowed cash to pump up the economy again, hoping against hope that it would not blow up before his re-election. | In other words, he would use another pile of borrowed cash to pump up the economy again, hoping against hope that it would not blow up before his re-election. |
| Without control of the House of Representatives, his plans are in ruins. And that was obvious to stock and bond traders, who followed the vote in November by putting a sell sign over their maps of America. | Without control of the House of Representatives, his plans are in ruins. And that was obvious to stock and bond traders, who followed the vote in November by putting a sell sign over their maps of America. |
| December has proved to be the worst month for shares in many decades. Oil prices have slumped and the market is expecting worse to come in the new year. | December has proved to be the worst month for shares in many decades. Oil prices have slumped and the market is expecting worse to come in the new year. |
| The reasons for pessimism are piling up. From the Atlantic to the Pacific, US home sales are struggling, with agents reporting that there are not enough buyers and asking prices are not being met. | The reasons for pessimism are piling up. From the Atlantic to the Pacific, US home sales are struggling, with agents reporting that there are not enough buyers and asking prices are not being met. |
| A measure of private-sector activity showed the US economy slipped to its lowest growth rate for 18 months in December, hit by declining car sales. Meanwhile, the Federal Reserve deems the strength of the economy to be enough to withstand several more rate rises. There was one last week and at least two more are expected next year. | A measure of private-sector activity showed the US economy slipped to its lowest growth rate for 18 months in December, hit by declining car sales. Meanwhile, the Federal Reserve deems the strength of the economy to be enough to withstand several more rate rises. There was one last week and at least two more are expected next year. |
| Analysts told investors that the impetus from Trump’s tax cuts was running out, and without anything to replace them there needed to be a lift from trade. | Analysts told investors that the impetus from Trump’s tax cuts was running out, and without anything to replace them there needed to be a lift from trade. |
| However, in China, Xi Jinping’s rebalancing of the economy away from highly subsidised smoke-stack industries towards greater consumer spending is not going so well. Several times he has been forced to allow higher borrowing to keep businesses and consumers from declaring themselves bankrupt. | However, in China, Xi Jinping’s rebalancing of the economy away from highly subsidised smoke-stack industries towards greater consumer spending is not going so well. Several times he has been forced to allow higher borrowing to keep businesses and consumers from declaring themselves bankrupt. |
| There are plenty of analysts who believe the control accrued by the Chinese Communist party will provide the government with the levers to eventually carry through its plan. | There are plenty of analysts who believe the control accrued by the Chinese Communist party will provide the government with the levers to eventually carry through its plan. |
| But in the meantime, the world’s second largest economy and biggest source of imports to the US is troubled and its previously formidable manufacturing engine is spluttering. | But in the meantime, the world’s second largest economy and biggest source of imports to the US is troubled and its previously formidable manufacturing engine is spluttering. |
| Europe was looking like a saviour earlier this year when GDP figures showed a healthy level of growth across almost the entire continent. Yet a slowdown is already in train, partly Brexit-related and partly in response to China’s woes, which have hit German exports hard. | Europe was looking like a saviour earlier this year when GDP figures showed a healthy level of growth across almost the entire continent. Yet a slowdown is already in train, partly Brexit-related and partly in response to China’s woes, which have hit German exports hard. |
| And in recent days Trump has given markets something else to worry about – building the wall. His threat to shut down the government if Congress refuses to provide him with the money for a pan-American border fence with Mexico has spooked traders. | And in recent days Trump has given markets something else to worry about – building the wall. His threat to shut down the government if Congress refuses to provide him with the money for a pan-American border fence with Mexico has spooked traders. |
| This reckless threat was preceded by the surprise decision to pull US troops out of Syria. If Trump could make such a move without consulting important allies, then perhaps he was capable of the “long shutdown” he has promised in his tweets. | This reckless threat was preceded by the surprise decision to pull US troops out of Syria. If Trump could make such a move without consulting important allies, then perhaps he was capable of the “long shutdown” he has promised in his tweets. |
| With ever fewer calming voices in the White House to rein in the president’s wilder excesses, it’s understandable that the finance industry is jittery about the prospects for 2019. | With ever fewer calming voices in the White House to rein in the president’s wilder excesses, it’s understandable that the finance industry is jittery about the prospects for 2019. |
| Centrica will have to answer to customers over price cap | Centrica will have to answer to customers over price cap |
| The UK’s biggest energy company arguably has a good case for launching a legal challenge to the government’s price cap. British Gas owner Centrica’s case hinges on a technicality over how energy regulator Ofgem changed how wholesale costs were used to set the cap, which some industry watchers likened to “moving the goalposts”. | The UK’s biggest energy company arguably has a good case for launching a legal challenge to the government’s price cap. British Gas owner Centrica’s case hinges on a technicality over how energy regulator Ofgem changed how wholesale costs were used to set the cap, which some industry watchers likened to “moving the goalposts”. |
| The firm may also say it doesn’t intend to delay the implementation of the cap, even though a court case could inadvertently have that effect. But for a company that has gone all-in on a strategy of focusing on customers, the move is strikingly tone deaf. | The firm may also say it doesn’t intend to delay the implementation of the cap, even though a court case could inadvertently have that effect. But for a company that has gone all-in on a strategy of focusing on customers, the move is strikingly tone deaf. |
| The Observer is no huge fan of the price cap, which will not fix the market’s problems, but Centrica’s decision to challenge it is a terrible look just a fortnight before it takes effect. | The Observer is no huge fan of the price cap, which will not fix the market’s problems, but Centrica’s decision to challenge it is a terrible look just a fortnight before it takes effect. |
| Yes, the company faces a one-off hit of £70m because of the change of methodology for the cap. But British Gas makes the biggest profit margin of the big six energy firms, at 8%, which has been stable since 2016. | Yes, the company faces a one-off hit of £70m because of the change of methodology for the cap. But British Gas makes the biggest profit margin of the big six energy firms, at 8%, which has been stable since 2016. |
| The company is already losing more than 90,000 customers a month. All customers should look at the challenge to the cap and ask whether this is a firm they want to give their business to. | The company is already losing more than 90,000 customers a month. All customers should look at the challenge to the cap and ask whether this is a firm they want to give their business to. |
| Centrica is trying to use a cost-cutting programme to preserve its margins, but even that is running into trouble – witness the rebellion by engineers against a proposed downgrade of their pensions. | Centrica is trying to use a cost-cutting programme to preserve its margins, but even that is running into trouble – witness the rebellion by engineers against a proposed downgrade of their pensions. |
| The reality is this is not a happy time to be a legacy energy supplier. SSE is trying, but failing, to shed its energy supply arm, while the fate of npower is unclear. Insurgents are rapidly taking their market share. | The reality is this is not a happy time to be a legacy energy supplier. SSE is trying, but failing, to shed its energy supply arm, while the fate of npower is unclear. Insurgents are rapidly taking their market share. |
| The cap does have one silver lining for the big six, and that’s the prospect of fewer customers switching as savings diminish. It’s up to consumers to ensure that doesn’t happen. | The cap does have one silver lining for the big six, and that’s the prospect of fewer customers switching as savings diminish. It’s up to consumers to ensure that doesn’t happen. |
| Even construction giants like Carilllion aren’t too big to fail | Even construction giants like Carilllion aren’t too big to fail |
| The collapse of Carillion at the start of this year cost taxpayers £148m, according to the National Audit Office’s estimate in June. Nobody would describe that sum as money well spent, but it’s also clear there was one big benefit in letting the huge construction firm go bust: the rest of the industry has had to get its balance sheets in order. | The collapse of Carillion at the start of this year cost taxpayers £148m, according to the National Audit Office’s estimate in June. Nobody would describe that sum as money well spent, but it’s also clear there was one big benefit in letting the huge construction firm go bust: the rest of the industry has had to get its balance sheets in order. |
| It is sometimes forgotten that Carillion’s board expected to be bailed out by the government with a loan. “I’m still somewhat perplexed that they weren’t able to give us that support,” chief executive Keith Cochrane told MPs in February. | It is sometimes forgotten that Carillion’s board expected to be bailed out by the government with a loan. “I’m still somewhat perplexed that they weren’t able to give us that support,” chief executive Keith Cochrane told MPs in February. |
| That delusional attitude, arguably, explains how Cochrane’s predecessors landed Carillion in such a mess. Dividends, and borrowings, were cranked up on the unspoken assumption that the company was too big to fail. In a crisis, the government, as the major customer, would always help. | That delusional attitude, arguably, explains how Cochrane’s predecessors landed Carillion in such a mess. Dividends, and borrowings, were cranked up on the unspoken assumption that the company was too big to fail. In a crisis, the government, as the major customer, would always help. |
| The explosion of the myth has had a chilling effect in boardrooms throughout the sector. Any debt-laden company described as a possible “next Carillion” has been obliged to repair its finances. | The explosion of the myth has had a chilling effect in boardrooms throughout the sector. Any debt-laden company described as a possible “next Carillion” has been obliged to repair its finances. |
| Interserve, with 45,000 staff in the UK and thousands of government contracts for cleaning hospitals and serving school meals and suchlike, is currently engaged in debt-for-equity talks with its banks. | Interserve, with 45,000 staff in the UK and thousands of government contracts for cleaning hospitals and serving school meals and suchlike, is currently engaged in debt-for-equity talks with its banks. |
| Construction firm Kier Group, meanwhile, completed a £264m rights issue last week. Its shareholders, spooked by falling stock markets and Brexit, shunned the fund-raising but the company got its money as the rights issue was underwritten by banks and brokers. Kier now looks a more solid prospect. There is no guarantee, of course, that disruptive Carillion-style collapses won’t happen in future. Failure is always a possibility, especially in this sector – the provision of public services by the private sector is sure to be in the political gaze. But we’ve now moved to a position where the strength of a balance sheet matters when contracts are dished out. That’s a good thing. | Construction firm Kier Group, meanwhile, completed a £264m rights issue last week. Its shareholders, spooked by falling stock markets and Brexit, shunned the fund-raising but the company got its money as the rights issue was underwritten by banks and brokers. Kier now looks a more solid prospect. There is no guarantee, of course, that disruptive Carillion-style collapses won’t happen in future. Failure is always a possibility, especially in this sector – the provision of public services by the private sector is sure to be in the political gaze. But we’ve now moved to a position where the strength of a balance sheet matters when contracts are dished out. That’s a good thing. |
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