WeeklyWatch – The new Prime Minister takes his place

Monday 29th July 2019

Stock Take

Johnson makes a lively start

After winning the Conservative Party leadership contest with two thirds of the vote, Boris Johnson received the keys to 10 Downing Street last week. After entering through the famous black door, Johnson was greeted by ‘Chief Mouser to the Cabinet Office’, Larry the cat. Larry has been in residence since 2011, and has already outlasted two Prime Ministers. And don’t bet against him seeing off a third, especially considering Johnson has borne several protests before even starting his new job, plus, he has inherited a very slim parliamentary majority – and, of course, the contentious issue of Brexit.

In typical Boris style, the new Prime Minister made a bombastic start to his reign, stating in his maiden speech: “The people who bet against Britain are going to lose their shirts because we are going to restore trust in our democracy, and we are going to fulfil the repeated promises of parliament to the people and come out of the EU on 31 October, no ifs or buts”. This was followed by one of the most ruthless culls of senior government figures ever – more than half the members of Cabinet were sacked or opted to resign having seen the writing on the wall.

Johnson survived until the parliamentary recess without Labour calling a vote of no confidence in his leadership – however, the scrutiny of his Brexit position is unlikely to decrease. With less than 100 days until the UK’s scheduled departure from the EU, Nigel Farage, leader of The Brexit Party, made overtures about an electoral pact, and the Liberal Democrats’ new leader, Jo Swinson, promised to fight a no-deal Brexit every step of the way.

The newly appointed Chancellor, Sajid Javid, may also have a busy few weeks ahead of him. After years of austerity, the new PM will be keen to deliver on his campaign promise to loosen fiscal policy – public spending as a share of GDP is at its lowest level since 2004. There have been rumours of an emergency (and generous) Budget in September, ahead of Brexit, but the summer recess and autumn party conference may mean this is unlikely to materialise. Markets initially shrugged off the week’s upheaval, as Johnson’s victory was already priced in.

US fails to meet Trump’s economic growth target

President Trump was one of the first to offer his congratulations to Boris Johnson, referring to him as “Britain’s Trump”. However, there was little for him to celebrate back home, with revised figures showing that the US economy only grew at 2.5% – well below the 3% target. Not only that – second-quarter growth slowed to 2.1% (annualised).

Chair of the Federal Reserve Jay Powell will have to deliberate whether this slow growth impacts the scale of an anticipated interest rate cut when the Fed meets tomorrow (30 July). He may also be cautious of a mixed earnings season for many companies this week. Alphabet, the parent company of Google and YouTube, saw its after-tax profits triple compared to a year ago, while its revenues rose 19%, beating expectations. On the other side of the coin (quite literally), Amazon’s results fell below expectations, despite increased revenues – a disappointment after four consecutive quarters of record profits.

Despite buoyant stock markets and a fresh high for the S&P 500, the growth outlook remains uncertain. Chris Ralph, Chief Investment Officer at St. James’s Place, commented: “What we’re looking at today is a position where the valuation on the US market isn’t actually at stratospheric levels and nowhere near where it was at 1987 or 1929 [when the market crashed]. But if we move into the third and fourth quarter and companies start missing on their earnings targets, then people are going to get more worried.”

Global economy suffers cut growth forecasts

The International Monetary Fund cut its growth predictions for the global economy this year and next. It did the same for the US, but it upped its growth forecast for 2019 for the UK, and even raised its 2020 forecast, although this was only on the basis of an orderly Brexit – a no-deal Brexit was named as one of the biggest threats to global growth. The National Institute of Economic and Social Research said the mounting risk of a no-deal Brexit means there is a 25% chance the UK is already in a recession and predicts GDP has fallen 0.1% in the second quarter.

Fears of stagnation are leading to the European Central Bank (ECB) cutting interest rates and resuming quantitative easing. Last week, ECB president Mario Draghi said that, since “the outlook is getting worse and worse”, interest rates would not rise until mid-2020 at the earliest. A key measure of eurozone manufacturing growth fell to a seven-year low, and eurozone inflation is significantly below target.

Wealth Check

Inheritance Tax is doing nothing to alleviate its reputation as ‘UK’s most unpopular tax’ as HMRC ramps up investigations into the estates of the recently deceased. IHT-liable estates for now have a one-in-four chance of being investigated by the taxman, with the number of cases rising nearly 8% last year to 5,537.1

The tax, which saw record-level receipts of £5.2 billion in 2018, is infamously complex.2 The introduction of the residence nil-rate band in 2017, which provides an additional IHT allowance where a property is passed to a direct descendant, has made the system even harder to navigate. The result: the number of IHT investigations has increased year-on-year since its introduction.3

Even then-Chancellor Philip Hammond admitted last year that IHT is complex – he therefore commissioned the Office of Tax Simplification (OTS) to review the tax and offer proposals “to ensure that the system is fit for purpose and makes the experience of those who interact with it as smooth as possible”.

OTS’s second report, released early in July 2019, (unsurprisingly) found ‘many areas where Inheritance Tax is either poorly understood, counter-intuitive…or…simply unclear’, and therefore made 11 proposals designed to simplify the complex patchwork of charges and reliefs. Yet critics of the report say it has “skirted around some prickly subjects, and made others even more knotty”, with the risk that the accompanying changes to Capital Gains Tax may make IHT more, not less, complicated.4

Tony Müdd, of St. James’s Place, commented: “The increased scrutiny reflects the government’s desire to clamp down on tax evasion. But any oversight by executors is far more likely to be due to the complexity rather than an attempt to defraud HMRC. It does, though, highlight the importance of executors getting the right advice.”

1 MoneyAge, ‘25% of estates liable to pay IHT investigated by HMRC’, July 2019
2 Moneywise, ‘IHT payments top £5 billion in 2018 – and are set to keep rising’, July 2019
3 MoneyAge, ‘25% of estates liable to pay IHT’, July 2019
4 Adviser Points of View, ‘What does the OTS review of inheritance tax mean for financial planning?’, July 2019

In The Picture

Foreign technology majors have had an infamously tough time in China’s heavily vetted market. Yet, in some cases, the casualties of the early 2000s, such as Amazon and Yahoo!, have enjoyed a recent resurgence – and re-entered the Chinese market.

The Last Word

“They call him ‘Britain’s Trump’, and people are saying that’s a good thing. They like me over there. That’s what they wanted. That’s what they need.”

Donald Trump on Boris Johnson.

The information contained is correct as at the date of the article.

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