Bond Outlook by bridport & cie, April 24 2013
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Bond Outlook by bridport & cie, April 24 2013

It is time that authorities recognise that economic growth cannot be generated with macro-economics alone. Micro-economics, especially the encouragement of innovative entrepreneurship is also an essential component.

The scepticism that we have expressed in this Weekly about the basis for a sustained recovery is now becoming widespread, particularly with regards to Europe, but also about the USA and China, where there is still growth, but at a slower rate. Excessive austerity is blamed, and the voices taking that view are growing ever louder. Articles are appearing (such as that by Martin Wolf in the FT) citing historical examples of national debt being absorbed via economic growth, as in the UK after the Napoleonic Wars 200 years ago.


The conclusion of Reinhart and Rogoff, that a 90% debt to GDP ratio is a ceiling above which growth slows sharply, is encountering increasing criticism. High debt and slow growth go hand in hand, but which causes which is under question; it may well be that slow growth causes high debt.


We have to confess to undergoing a conversion. While we remain convinced that spending beyond many countries’ means eventually caused the recession, the way forward is to seek slower growth, rather than risking recession by draconian austerity. We also remain strong believers that growth comes primarily from entrepreneurship and innovation. One overriding problem is now holding back growth: access to capital for privately held small and medium sized companies.


This blockage factor has belatedly been recognised by the ECB, who complain that the transmission mechanism for its QE programme has failed in making funds available for private borrowers. The ECB does not however say what it proposes. To find a possible approach, a look at the UK is appropriate. This is ironic, as Chancellor Osborne epitomises a stubborn commitment to austerity against all opposition.


Yet within the austerity-palled UK, there are two sources of optimism:


  • at the macro-economic level, the BoE has introduced an FLS (Funds for Lending Scheme), with cheap sourcing for banks lending to PMEs and start-ups. FLS is now being expanded to non-bank lenders and to banks which lend to non-bank lenders


  • at the micro-economic level, entrepreneurial clusters are producing innovations galore. They are typified by Techhub in London, the Cambridge Phenomenon, and Edinburgh’s Techcube, but there are many more.


The key strengths of these “clusters” are the mutual support provided by innovators being in close proximity to each other (and to business services), and the attraction to the clusters of venture capitalists and angel investors. It would just take a little less stubbornness from Osborne for this two-pronged approach to bring measurable results for the recovery!


In the meantime, the imminent creation of an Italian Government, even if short-lived, will help steady nerves in Europe and could even help address the issues of the “democratic deficit” of the EU. It may help remove the obstacle of excessive austerity. Again we see the right programme for recovery lying in the harnessing of the inherent innovation and entrepreneurial skills of great numbers of European citizens, certainly including Italians. In general, governments should be encouraging innovation, not directing it.


Admittedly our thoughts this week may seem far from our usual fare of macro-economics and fixed-income, but they follow directly from the observation that credit is almost closed to companies without access to the bond market.


Macro Focus


United States


The index of U.S. leading indicators declined 0.1% in March (the first drop since August). The Philadelphia factory index eased to 1.3 and the manufacturing activity in the central Atlantic region also pulled back.


In March, purchases of existing houses fell 0.6 % to a 4.92 million annual rate, but those of new homes rose, capping the best quarter for the industry since 2008. A shortage of existing properties is encouraging builders to undertake new projects. Mortgage rates close to record lows, higher home values, and rising household formation are helping increase buyer interest in 2013.




Euro-area services and factory output shrank for a 15th month in April, adding to pressure on the European Central Bank to do more to boost growth. The PMI composite index held at 46.5


Construction output in the euro area declined for a fourth month in February, led by slumping activity in Germany. Construction in the euro zone decreased 0.8 % from January, when it fell 2.1 %.


Euro area 2012 government debt swelled to record 90.6% of GDP.


United Kingdom


Unemployment rose at the fastest pace in more than a year and wage increases slowed. The unemployment rate climbed to 7.9 % from 7.8 % in the previous quarter.


Cold weather during the month depressed purchases of clothing and household goods. Retail sales including fuel fell 0.7 % from February.


The budget deficit narrowed as capital spending fell. The shortfall, excluding temporary support for banks, was £ 15.1 billion, compared with £ 16.7 billion a year earlier.




Investor confidence climbed to the highest level since May 2010. The Credit Suisse ZEW Survey rose from 2.3 to 20.0 in April.


Exports rose 5.1% in March. The trade surplus shrank to CHF 1.9 billion from a revised CHF 2 billion in February.

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