Santander Corporate Banking Intelligence Weekly Business News Update

‘News from Toronto’

“Leaders from the twenty most powerful economies have just returned from Toronto. Whilst there, they discussed the state of the global economy and what policy measures are desirable to try to keep the economy on its path of recovery and to assist the pace of that recovery. They also covered other topics, including financial sector reform.

The nine page declaration following the summit noted that while growth was returning, “the recovery is uneven and fragile, unemployment in many countries remains at unacceptable levels, and the social impact of the crisis is still widely felt”.

The declaration highlighted growing recognition of the difficulties with public finances in several countries. The focus was on fiscal sustainability, reflecting the new policy mood for restraining the growth of public sector borrowing and debt. The press reports commented on some disagreement amongst the G-20 members about how to proceed with fiscal tightening (or rebalancing). The German Government appears to be at the forefront of the drive to act early. The USA, although its Government borrowing and debt have grown substantially, seems to be taking a much softer line and arguing for more gradual tightening as the recovery builds. Some prominent US economists are arguing for a further fiscal boost to try to start the process of reducing unemployment and to mitigate the effect of negative shocks to activities that have been occurring. In
the end the statement was an inevitable, but sensible, compromise: “the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances”.

The Government here has set out its plans in the Budget, although the Spending Review will set out the spending changes in detail later this year. The most recent news has been that there is an implied reduction of around 500,000 public sector jobs over the next four years. This estimate includes the effect of the March and June budgets together and not just the June budget. The challenge for the UK economy is therefore for the private sector to expand its employment, not only to cover this prospective loss of jobs but also to reduce the number of people who are currently unemployed.”

Barry Naisbitt, Chief Economist, Santander UK

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