Bank of England's pay forecasts too optimistic, say economists

Mark Carney, governor of Bank of England, with Ben Broadbent, deputy governor for monetary policy, in London. (Reuters)
Updated 19 May 2017

Bank of England's pay forecasts too optimistic, say economists

LONDON: The Bank of England’s (BoE) growth and wage forecasts are too rosy, according to economists polled by Reuters who were divided on what a large Conservative majority in June’s UK election would mean for Britain's divorce terms from the EU.
BoE Gov. Mark Carney said the forecasts hinged on a “smooth” transition to Brexit, as well as a big pick-up in wage growth and stronger exports and investment — things the central bank has predicted before, but which have largely not materialized.
Wage inflation would rise to 3.75 percent in 2019, the bank said. But all except four of the 26 economists polled this week who answered an extra question said that was unlikely or very unlikely. The median forecast was 3.1 percent.
“The risks have in our view shifted toward a hard Brexit, in which case the UK economy in 2018-2019 will be facing headline-grabbing reductions of UK operations by foreign corporations, relocation to continental Europe and lay-offs,” said Marius Gero Daheim at SEB.
“This environment does not bode well for pay increases in the order of 4 percent.”
British pay growth lagged inflation for the first time in 2-1/2 years in early 2017. Excluding bonuses, it rose 2.1 percent year-on-year in the three months to March, the weakest increase since July, data showed on Wednesday.
Since last June’s referendum vote to leave the EU, Britain's stance has hardened. Prime Minister Theresa May has said she expects divorce talks to be tough and EU leaders have agreed stiff terms.
Previous Reuters polls have concluded that talks turning fractious would pose the biggest risk to Britain’s economy and to the pound.
Hoping to build a dominant position in parliament and strengthen her hand in the EU talks, May has called a snap election for June 8.
The prime minister’s ruling Conservative party has a runaway lead in opinion polls, a result which could give a vote of confidence in a vision for Brexit which now sees the country outside the EU’s single market.
But most respondents, who answered an extra question, did not take that view. A dozen said if the opinion polls were correct and the Conservatives get a sizeable majority, there would be no effect on the success of Britain’s divorce negotiations.
Nine said that outcome would bring about a more constructive relationship while six said it would add distance between the two sides.
The central bank said last week that Britain’s economy would grow 1.9 percent this year, 1.7 percent next and 1.8 percent in 2019, but median estimates in the poll were all lower — respectively 1.7, 1.4 and 1.5 percent.
Only 10 of the 60 economists polled were as or more upbeat about growth prospects this year than the bank. For 2018, the ratio was 11 of 58.
“The BoE’s growth forecasts appear too optimistic. They are conditional on a very smooth Brexit, which is unlikely,” said Daniel Vernazza at UniCredit.
Sterling is down well over 10 percent from levels ahead of the June referendum and its weakness is stimulating domestic inflation. It is unlikely to move far in the coming year, according to a Reuters poll earlier this month.
The premier, meanwhile, said she would tighten laws on company takeovers and would ensure any foreign group buying important infrastructure did not undermine security or essential services if she wins next month’s national election.
“We will require bidders to be clear about their intentions from the outset of the bid process; that all promises and undertakings made in the course of takeover bids can be legally enforced afterwards; and that the government can require a bid to be paused to allow greater scrutiny,” the Conservative Party said in its election policy document.
It also said the Conservatives “do not believe in untrammeled free markets” as it set out plans to cap rising energy costs for consumers.
The prime minister continues to believe that no Brexit deal would be better than a bad deal, according to the document.

Saudi stocks receive landmark emerging markets upgrade from MSCI

Updated 21 June 2018

Saudi stocks receive landmark emerging markets upgrade from MSCI

  • Market authorities in Saudi Arabia have introduced a series of reforms in the past 18 months
  • MSCI’s Emerging Market index is tracked by about $2 trillion in active and global funds

LONDON: Saudi Arabian equites are poised to attract up to $40 billion worth of foreign inflows, following a landmark decision by index provider MSCI to include the Kingdom’s stocks in its widely tracked Emerging Markets index.

"MSCI will include the MSCI Saudi Arabia Index in the MSCI Emerging Markets Index, representing on a pro forma basis a weight of approximately 2.6% of the index with 32 securities, following a two-step inclusion process," the MSCI said in a statement late on Wednesday night Riyadh time.

“Saudi Arabia’s inclusion in MSCI’s EM Index is a milestone achievement and will likely bring with it significant levels of foreign investment,” Salah Shamma, head of investment for MENA at Franklin Templeton Emerging Markets Equity, told Arab News. 

“It is a recognition of the progress Saudi Arabia has made in implementing its ambitious capital markets transformation agenda. The halo effect of such a move will be felt across the stock exchanges of the entire Gulf Cooperation Council (GCC).”

Market authorities in Saudi Arabia have introduced a series of reforms in the past 18 months to bring local capital markets more in line with international norms, including lower restrictions on international investors, and the introduction of short-selling and T+2 settlement cycles.

Such reforms prompted index provider FTSE Russell to upgrade the Kingdom to emerging market status in March, opening the country’s stocks up to billions worth of passive and active inflows from foreign investors.

MSCI’s Emerging Market index is tracked by about $2 trillion in active and global funds. The inclusion of Saudi stocks in the index, alongside FTSE Russell’s upgrade, is forecast to attract as much as $45 billion of foreign inflows from passive and active investors, according to estimates from Egyptian investment bank EFG Hermes. 

The upgrade announcement was widely expected by the region’s investment community, following a similar emerging markets upgrade announcement by fellow index provider FTSE Russell in March. 

“MSCI index inclusion will be a historic milestone for the Saudi market as it will allow for sticky institutional money to make an entry in 2019 which will help deepen the market,” said John Sfakianakis, director of economic research at the Gulf Research Center in Riyadh.