#canada – Martin Wheatcroft

ICAEW chart of the week: BRICS+

The ICAEW chart of the week returns from its summer holidays to look at the planned expansion of BRICS from five to 11 countries.

Venn diagram showing the G20, G7, BRICS, and BRICS+:

G20 in green, encompassing G7 in teal with USA, Japan, Canada and UK plus in blue with dotted line around Germany, France, Italy and the European Union (the EU members of the G7).

Then five countries in G20, but not in the G7, BRICS or BRICS+, being Korea, Australia, Mexico, Indonesia and Türkiye.

Tne BRICS+ in purple with Argentina and Saudi Arabia followed by BRICS in orange with Brazil, Russia, India, China and South Africa. Still in the BRICS+ purple, but outside the G20 green are Ethiopia, Iran, Egypt and UAE.

Sources: G20, G7, BRICS.

Footnote gives share of global GDP: G20 86%. G7 52% (USA 26%, EU 17%), KAMIT 7%, BRICS 25%, BRICS+ 28%.

“The BRICs” was originally coined by Jim O’Neill in 2001 as an abbreviation for Brazil, Russia, India and China, four fast-growing economies that he predicted would come to dominate the world economy.

This investment shorthand evolved into something more substantive in 2006 when ministers from the four countries got together on the sidelines of a meeting at the UN. Leader summits started in 2009, followed by the addition of South Africa in 2011, which resulted in the capitalisation of the final ‘s’ to form BRICS.

BRICS has developed over time to become a counterweight to the G7, providing an alternative forum for leaders of these five major nations to discuss common concerns such as economic development, currency stability, climate change, and tackling drug trafficking and organised crime. BRICS has been increasingly important to Russia since its ejection from the G7 (then the G8) following its invasion of Crimea in 2014 and to China as relations with the G7 have deteriorated over the last decade.

The most recent summit (the 15th) was on 22-24 August 2023, at which it was announced that six additional countries would be joining on 1 January 2024 to bring the number of members to 11.

Our chart this week takes the form a Venn diagram to illustrate how BRICS, and the expanded “BRICS+” grouping (pending a new official name), fit with two other major intergovernmental organisations where leaders meet on a regular basis – the G7 and the G20.

It starts with the G20, a grouping of 19 nations and the European Union that together represent 86% of the global economy. Within this sit the eight members of the G7 group of advanced economies, representing 52% of the global economy: the USA (26%), Japan (4%), the UK (3%), Canada (2%), Germany (4%), France (3%), Italy (2%) and the European Union (17% including Germany, France and Italy). The five BRICS nations represent 25% of the global economy comprising: Brazil (2%), Russia (1.7%), India (4%), China (17%) and South Africa (0.4%).

The diagram is complicated by the expanded BRICS+ as although invitees Argentina (0.6%) and Saudi Arabia (1.0%) are also members of the G20, the other four new members – Ethiopia (0.2%), Iran (0.3%), Egypt (0.3%) and the United Arab Emirates (0.5%) – are outside the G20. These new members together represent 3% of the global economy, taking the expanded BRICS+ to 28%.

Squeezed between the G7 and BRICS+ are five G20 members that together make up around 7% of the global economy that are not in either grouping, being (South) Korea (1.6%), Australia (1.6%), Mexico (1.8%), Indonesia (1.4%) and Türkiye (0.8%). As yet there is no sign of an intergovernmental organisation for these “KAMIT” nations to complement the G7 and BRICS, although in practice they are often invited as guests to G7 summits in addition to their participation in meetings of the G20.

The attraction of intergovernmental forums such as the G7, BRICS and the G20 is that they enable national leaders to engage directly with their counterparts on a wide range of topics, in contrast to the often narrower focus and more formal diplomatic structures of treaty-based international organisations such as the Organisation for Economic and Co-operation Development (OECD), the World Bank or the Organisation of American States (OAS) for example.

Their informal nature gives national leaders more flexibility to (for example) change their memberships without lengthy treaty negotiations or to work together on pressing issues of mutual concern. However, that informality also makes it difficult to create binding resolutions, which is perhaps why the global alternative reserve currency proposed at the first BRICS summit in 2009 had still not been implemented by the time of the 15th summit this August.

ICAEW chart of the week: Inflation around the world

This week we look at how inflation is racing upwards across the world, with the UK reporting in April one of the highest rates of increase among developed countries.

Bar chart showing inflation rates by G20 country: Russia 17.8%, Nigeria 16.8%, Poland 12.4%, Brazil 12.1%, Netherlands 9.6%, UK 9.0%, Spain 8.3%, USA 8.3%, India 7.8%, Mexico 7.7%, German 7.4%, Canada 6.8%, Italy 6.0%, South Africa 5.9%, France 4.8%, South Korea 4.8%, Indonesia 3.5%, Switzerland 2.5%, Japan 2.4%, Saudia Arabia 2.3%, China 2.1%.

Inflation has increased rapidly over the last year as the world has emerged from the pandemic. A recovery in demand combined with constraints in supply and transportation has driven prices, with myriad factors at play. These include the effects of lockdowns in China (the world’s largest supplier of goods), the devastation caused by the Russian invasion in Ukraine (a major food exporter to Europe, the Middle East and Africa), and the economic sanctions imposed on Russia (one of the world’s largest suppliers of oil and gas).

As the chart shows, the UK currently has – at 9% – the highest reported rate of consumer price inflation in the G7, as measured by the annual change in the consumer prices index (CPI) between April 2021 and April 2022. This compares with 8.3% in the USA, 7.4% in Germany, 6.8% in Canada, 6.0% in Italy, 4.8% in France and 2.4% in Japan.

The UK’s relatively higher rate partly reflects the big jump in energy prices in April from the rise in the domestic energy price cap, which contrasts with France, for example, where domestic energy price rises have been much lower (thanks in part to state subsidies). The UK inflation rate also hasn’t been helped by falls in the value of sterling, making imported goods and food more expensive.

Other countries shown in the chart include Russia at 17.8%, Nigeria at 16.8%, Poland at 12.4%, Brazil at 12.1%, Netherlands at 9.6%, Spain at 8.3%, India at 7.8%, Mexico at 7.7%, South Africa 5.9%, South Korea at 4.8%, Indonesia at 3.5%, Switzerland at 2.5%, Saudi Arabia at 2.3% and China at 2.1%. For most countries, the rate of inflation is substantially higher than it has been for many years, reflecting just how major a change there has been in a global economy that had become accustomed to relatively stable prices in recent years.

This is not the case for every country, and the chart excludes three hyperinflationary countries that already had problems with inflation even before the pandemic, led by Venezuela with an inflation rate of 222.3% in April, Turkey with a rate of 70%, and Argentina at 58%.

Policymakers have been alarmed at the prospect of an inflationary cycle as higher prices start to drive higher wages, which in turn will drive even higher prices. For central banks that has meant increasing interest rates to try and dampen demand, while finance ministries have been looking to see how they can protect households from the effect of rising prices, particular on energy, whether that be by intervention to constrain prices, through temporary tax cuts, or through direct or indirect financial support to struggling households.

Here in the UK, both the Bank of England and HM Treasury have been calling for restraint in wage settlements as they seek to head off a further ramp-up in inflation. They hope that inflation will start to moderate later in the year as price rises in the last six months start to drop out of the year-on-year comparison and supply constraints start to ease, for example as oil and gas production is ramped up in the USA, the Middle East and elsewhere to replace Russia as an energy supplier, and as China emerges from its lockdowns.

Despite that, prices are likely to rise further, especially in October when the energy price cap is expected to increase by 40%, following a 54% rise in April. This is likely to force many to make difficult choices as household budgets come under increasing strain.

After all, inflation is much more than the rate of change in an arbitrary index; it has an impact in the real world of diminishing spending power and in eroding the value of savings.

This chart was originally published by ICAEW.

ICAEW chart of the week: G7 economic growth

The latest IMF economic forecasts put the UK at the bottom of the pile in 2023, but our chart this week elevates the UK to fifth place out of seven by looking at average growth for the four years from 2020 to 2023.

Chart presenting economic growth for the G7 in 2020, 2021, 2022, 2023 and the average over four years.

USA: -3.4%, +5.7%, +3.7%, +2.3%, average +2.0%
Canada: -5.2%, +4.6%, +3.9%, +2.8%, average +1.4%
Germany: -4.6%, +2.8%, +2.1%, +2.7%, average +0.7%
France: -8.0%, +7.0%, +2.9%, +1.4%, average +0.7%
UK: -9.3%, +7.4%, +3.7%, +1.2%, average +0.6%
Japan: -4.5%, +1.6%, +2.4%, +2.3%, average +0.4%
Italy: -9.0%, +6.6%, +2.3%, +1.7%, average +0.2%

Recent media reports have contrasted the government’s boast of being the best performing economy in the G7 in 2021 with the latest forecasts from International Monetary Fund (IMF) that suggest the UK economy will be bottom of the same league in 2023. Our chart this week attempts to take a step back and look at the overall picture by illustrative average economic growth by the G7 nations over the four years between 2020 and 2023.

These numbers are based on the IMF’s World Economic Outlook and the accompanying World Economic Outlook Database that were published on 19 April, setting out economic forecasts for the world economy over the next few years.

According to the IMF, the USA is the best performing economy in the G7, with average annual economic growth of +2.0% over the period from 2020 to 2023. An economic contraction of 3.4% in 2020 was more than offset by a rebound of 5.7% in 2021, followed by forecast growth of 3.7% in 2022 and 2.3% in 2023. Canada is not far behind, with an average growth of 1.4% over the four years, comprising respectively -5.2%, +4.6%, +3.9% and +2.8% in 2020, 2021, 2022 and 2023.

Germany and France fare pretty similarly to each other, with Germany projected to experience marginally above 0.7% average growth and France marginally below. The patterns are different, however, with Germany having suffered a less severe economic hit during 2020 followed by moderate growth (-4.6%, +2.8%, +2.1%, 2.7%), while France was hit much harder by the pandemic followed by a much stronger rebound before a return to lower growth in 2023 (-8.0%, +7.0%, +2.9%, +1.4%).

The UK is in fifth place in this league table, but at 0.6% average economic growth over the four years selected this is only slightly less than Germany and France. With an economic contraction in 2020 of 9.3%, the UK suffered more severely from the pandemic than the other members in the G7 (although this is partly because of differences in statistical methodologies) but then saw the biggest rebound in 2021 with growth of 7.4%. Growth this year is forecast by the IMF to be 3.7% before falling to an (unfortunately) more typical level of 1.2% in 2023.

Vying for the wooden spoon are Japan and Italy, with Japan continuing a long period of low growth and a slower recovery from the pandemic than the others to average 0.4% a year (-4.5%, +1.6%, +2.4%, +2.3%). Italy secured the bottom position by virtue of being hit hardest by the pandemic and having less of a rebound than others (-9.0%, +6.6%, +2.3%, +1.7%), a net average growth rate of 0.2% over the four-year period.

For those that follow this particular league table, there is a hope that slightly stronger growth than the IMF has forecast could move the UK up one or two places above France and/or Germany. However, the bigger concern for most of us is about the downside risks to the global and UK economies from the war in Ukraine, rampant inflation, and a global cost of living crisis. These may put back even further any hope of returning the UK and other developed economies to a pre-financial crisis path of moderate economic growth.

This chart was originally published by ICAEW.

ICAEW chart of the week: Government borrowing rates

Our first chart of 2022 highlights how the cost of government borrowing remains extremely low for most of the 21 largest economies in the world, despite the huge expansion in public debt driven by the pandemic.

Government 10-year bond yields: Germany -0.13%, Switzerland -0.07%, Netherlands 0.00%, Japan 0.09%, France 0.23%, Spain 0.60%, UK 1.08%, Italy 1.23%, Canada 1.59%, USA 1.65%, Australia 1.79%, South Korea 2.38%, China 2.82%, Poland 3.87%, Indonesia 6.38%, India 6.51%, Mexico 8.03%, Russia 8.38%, Brazil 10.73%, Turkey 24.21%.

Our chart of the week illustrates how borrowing costs are still at historically low rates for most of the 21 largest national economies in the world, with negative yields on 10-year government bonds on 5 January 2022 for Germany (-0.13%) and Switzerland (-0.07%), approximately zero for the Netherlands, and yields of sub-2.5% for Japan (0.09%), France (0.23%), Spain (0.60%), the UK (1.08%), Italy (1.23%), Canada (1.59%), the USA (1.65%), Australia (1.79%) and South Korea (2.38%).

This is despite the trillions added to public debt burdens across the world over the past couple of years as a consequence of the pandemic, including the $5trn added to US government debt since March 2020 (up from $17.6trn to $22.6trn owed to external parties) and the more than £500bn borrowed by the UK government (public sector net debt up from £1.8trn to £2.3trn) for example.

Yields in developing economies are higher, although China (2.82%) and Poland (3.87%) can borrow at much lower rates than Indonesia (6.38%), India (6.51%), Mexico (8.03%), Russia (8.37%) and Brazil (10.73%). The outlier is Turkey (24.21%), which is experiencing some difficult economic conditions at the moment. Data was not available for Saudi Arabia, the 19th or 20th largest economy in the world, which has net cash reserves.

With inflation higher than it has been for several years, real borrowing rates are negative for most developed countries, meaning that in theory it would make sense for most countries to continue to borrow as much as they can while funding is so cheap. However, in practice fiscal discipline appears to be reasserting itself, with Germany, for example, planning on returning to a fully balanced budget by the start of next year and the UK targeting a current budget surplus within three years.

For many policymakers, the concern is not so much about how easy it is to borrow today, but the prospect of higher interest rates multiplied by much higher levels of debt eating into spending budgets just as they are looking to invest to grow their economies over the rest of the decade. Despite that, with the pandemic still raging and an emerging cost of living crisis, there may well be a temptation to borrow ‘just one more time’ to support struggling households over what is likely to be a difficult start to 2022.

This chart was originally published by ICAEW.

ICAEW chart of the week: G7 economies

Our chart this week illustrates how in representing more than half of the world economy, decisions taken by the G7 can have a significant impact on the entire planet.

The G7 summit hasn’t formally started yet, but Group of Seven (G7) ministers and their guests have already started to meet ahead of the main event next month, albeit subject to quarantine restrictions.

The #icaewchartoftheweek illustrates how important this gathering is by highlighting how the seven major democratic nations and the European Union that together comprise the G7 represent more than half the global economy – and even more than that, once four invited guest nations are included.

Circular 'sunburst' chart showing G7 nations (USA, Japan, Germany, UK, France, Italy and Canada plus remaining EU nations), G7 guest nations (India, South Korea, Australia and a spoke for South Africa) and the rest of the world (China, Russia and Brazil followed by all the rest).

Overall, the G7 economies are forecast by the IMF to generate £35.9tn of economic activity in 2021 at current prices, 54% of forecast global GDP of £66.8tn. This comprises the economies of seven individual member nations: the USA (£16.3tn), Japan (£3.8tn), Germany (£3.1tn), the UK (£2.2tn), France (£2.1tn), Italy (£1.5tn) and Canada (£1.3tn), together with the 24 other EU member states (£5.6tn).

The guests invited to the 47th G7 summit in Cornwall are expected to generate a further £4.9tn or 7% of global GDP in 2021, bringing the total economic activity represented at the summit to £40.8tn or 61% of the total. They are India (£2.2tn), South Korea (£1.3tn), Australia (£1.2tn) and South Africa (£0.2tn).

Not represented at the G7 are China (£12.2tn), Russia (£1.2tn) and Brazil (£1.1tn) and around 160 other nations across the globe (£11.5tn in total).

The G7 summit presents an opportunity for the 11 national leaders and 2 EU representatives involved to shape the direction for much of the world, with discussions expected to range from saving the planet through to transparency in financial and non-financial reporting.

This chart was originally published by ICAEW.

ICAEW chart of the week: The debt of G7 nations

This week’s chart looks at how the pandemic has driven government debt levels higher, a topic that will be on the agenda at the G7 summit in Cornwall in six weeks’ time.

2019 General Government Net / GDP plus forecast change over 2020 and 2021:

Canada 23% + 14% = 37%
Germany 41% +11% = 52%
UK 75% + 22% = 97%
France 89% + 17% = 106%
USA 83% + 26% = 109%
Italy 122% + 22% = 144%
Japan 150% + 22% = 172%

The #icaewchartoftheweek is on the topic of government debt, looking at the indebtedness of the seven nations that comprise the G7 together with the EU.

The strength (or otherwise) of public finances will underlie many of the discussions at the upcoming G7 summit in Cornwall in June as countries decide how best to deal with the coronavirus pandemic, achieving net-zero carbon and the COP26 goals, strengthening defence and security, and economic recovery. All of these are likely to require significant public investment at a time when public finances have been hit hard from a combination of the financial crisis just over a decade ago and the coronavirus pandemic over the past year.

Perhaps best-placed amongst the G7 are Canada and Germany, with stronger public balance sheets than their peers putting them in a better position to fund public investment. Canada’s general government net debt to GDP ratio (the net debts of the federal government, provincial governments and local authorities combined compared with Canadian GDP) is forecast to increase from 23% at 31 December 2019 to 37% at 31 December 2021, while Germany’s general government net debt to GDP ratio is forecast to increase from 41% to 52% over the same period.

The UK is next with its general government net debt up from 75% of GDP to a forecast 97% of GDP, followed by France with its net debt increasing from 89% in December 2019 to a forecast 106% of GDP for the end of 2021. The USA is expected to overtake France with its major stimulus packages seeing debt rise from 83% as a proportion of GDP to 109% by the end of this year. The biggest ratios within the G7 are Italy, which is expected to increase from 122% to 144%, while Japan is expected to rise from 150% to 172% of GDP.

Not shown on the chart are G7 guest nations this year: Australia (up from 26% to a forecast 49% of GDP) and South Korea (12% to 23%) are both in relatively strong public finance positions, while India (74% to 99%) is in a more challenging fiscal situation.

Despite the differences in debt levels, there will be a commonality amongst all the nations present in needing to find money to deal with increased pressure on public services and social security systems as populations age, for public investment in achieving net zero and in infrastructure more generally, to fund defence in an increasingly unstable global security environment and in economic stimulus to restart economies as they reopen, not to mention the need to replace tax income on fossil fuels as they are eliminated over the coming decades.

The signs are that tax reform will play a larger part in discussions than it may have done previously, with the USA’s suggestion for a minimum corporation tax indicative of a move to limit tax competition between nations and work more collaboratively to capture tax receipts from increasingly mobile global corporations and individuals.

Hence while many of the headlines from the G7 summit are likely to be focused on the heads of government talking about the global response to the coronavirus pandemic, the global security situation and global plans to deliver net zero, the side room containing finance ministers discussing global taxation and global public investment may be just as consequential.

This chart was originally published by ICAEW.

ICAEW chart of the week: Canada Budget 2021

Canada Budget 2021

2020-21 Forecast outturn
C$635 (£363bn)

Budget shortfall C$339bn + Taxes and other income C$296bn
Covid-19 C$252bn + Federal spending C$363bn

2021-22 Federal budget
C$498bn (£285bn)

Budget shortfall C$143bn + Taxes and other income C$355bn
Covid-19 C$76bn + Federal spending C$422bn

Monday 19 April 2021 saw Chrystia Freeland, the Canadian deputy prime minister and minister of finance, release her country’s 725-page Budget 2021, setting out the Government of Canada’s plan to “finish the fight against COVID-19 and ensure a robust economic recovery that brings all Canadians along”.

As the #icaewchartoftheweek illustrates, the forecast outturn for the fiscal year ended 31 March 2021 involved spending by the federal government of C$635bn (equivalent to £363bn at an exchange rate of C$1,75:£1), resulting in a budget shortfall of C$339bn after taking taxes and other income of C$296bn into account. Spending comprised C$363bn on ‘normal’ federal government activities – operational spending, welfare payments and transfers to provinces and territories and C$272bn on exceptional measures in response to covid-19.

COVID-19 spending is much lower in 2021-22 at C$76bn, even as other spending increases to C$422bn as the federal government seeks to generate economic growth following the pandemic – total spending of C$498bn (£285bn). Assuming taxes and other income recovers to C$355bn as expected, the budget shortfall should reduce to C$143bn – still much higher than the C$29bn seen before the pandemic in 2019-20.

The federal finances were in a fairly strong position coming into the pandemic compared with many other countries, with debt at 31 March 2020 of C$813bn (31% of GDP) rising to C$1,176bn (49% of GDP) at 31 March 2021 and a forecast C$1,334bn (51% of GDP) at 31 March 2022. This provides Canada with some room for manoeuvre as it navigates its way after the pandemic.

Fortunately for Canadians, one side-effect of the US government’s stimulus package is that it is expected to not only drive growth in the US economy, but in its Canadian neighbour too.

More (much more) information is available in the Canada Budget 2021.

This chart was originally published by ICAEW.

ICAEW chart of the week: global military spending

19 March 2021: The UK’s Integrated Review is the inspiration for this week’s chart, illustrating the 20 countries around the world that spend the most on their militaries.

Chart showing global military spending in 2019 led by USA (£526bn) and China (£200bn) followed by 18 other countries - see text below the chart for details.

The UK Government launched its Integrated Review of Security, Defence, Development and Foreign Policy on 16 March 2021, setting out a vision for the UK’s place in the world following its departure from the European Union and in the context of increasing international tensions and emerging security threats.

At the core of the Integrated Review is security and defence, and ICAEW’s chart of the week illustrates one aspect of that by looking at military spending around the world.

The chart shows spending by the top 20 countries, which together comprise in the order of £1.2tn of estimated total military spending of around £1.4tn to £1.5tn globally in 2019 – an almost textbook example of the 80:20 rule in action.

More than a third of the total spend is incurred by just one country – the USA – which spent in the order of £526bn in 2019 converted at current exchange rates. The next biggest were China and India at £200bn and £50bn respectively, although differences in purchasing power mean that they can afford many more soldiers, sailors and aircrew for the same amount of money. This is followed by Saudi Arabia (£45bn), Russia (£41bn), France (£38bn), the UK (£38bn), Germany (£38bn), Japan (£34bn), South Korea (£33bn), Australia (£21bn), Italy (£20bn), Canada (£17bn), Israel (£16bn), Brazil (£14bn), Spain (£13bn), Turkey (£11bn), the Netherlands (£9bn), Iran (£9bn) and Poland (£9bn).

Exchange rates affect the relative orders of many countries in the list, for example between Russia, France, the UK and Germany which can move up or down according to movements in their currencies, while there are a number of caveats over the estimates used given the different structures of armed forces around the world and a lack of transparency in what is included or excluded in defence budgets in many cases.

In addition, the use of in-year military spending does not necessarily translate directly into military strength. Military capabilities built up over many years or in some cases (such as the UK) over many centuries need to be taken into account, as do differing levels of technological development and spending on intelligence services, counter-terrorism and other aspects of security. Despite these various caveats, estimated military spending still provides a useful proxy in understanding the global security landscape and in particular highlights the UK’s position as a major second-tier military power – in the top 10 countries around the world.

Global Britain in a Competitive Age: the Integrated Review of Security, Defence, Development and Foreign Policy sets out some ambitious objectives for security and defence, which it summarises as follows: “Our diplomatic service, armed forces and security and intelligence agencies will be the most innovative and effective for their size in the world, able to keep our citizens safe at home and support our allies and partners globally. They will be characterised by agility, speed of action and digital integration – with a greater emphasis on engaging, training and assisting others. We will remain a nuclear-armed power with global reach and integrated military capabilities across all five operational domains. We will have a dynamic space programme and will be one of the world’s leading democratic cyber powers. Our diplomacy will be underwritten by the credibility of our deterrent and our ability to project power.”

The estimates of military spending used in the chart were taken from the Stockholm International Peace Research Institute (SIPRI)’s Military Expenditure Database, updated to current exchange rates.

This chart was originally published by ICAEW.

ICAEW chart of the week: CP Trans-Pacific Partnership

12 February 2021: The UK wrote to New Zealand at the start of this month formally requesting permission to apply for membership of the Comprehensive and Progressive Trans-Pacific Partnership. What is the CPTPP and what opportunities would joining provide to the UK?

The #icaewchartoftheweek is on the UK’s application to join the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP), a group of eleven countries on the other side of the world. This trade organisation was established to improve trade links between countries surrounding the Pacific, reducing trade barriers between the countries involved and aligning regulations in areas such as intellectual property.

It is sometimes described as the third largest free-trade area in the world, after the US-Mexico-Canada Free Trade Agreement (USMCA, formerly NAFTA) and the EU-EEA-Switzerland Common Market, but it is important to understand that it is much less integrated than a customs union (with shared tariffs), a common market (with fuller regulatory alignment) or an economic union (such as the highly integrated EU Single Market with unified standards and regulations).

According to IMF forecasts for 2021, Japan is the largest economy in the CPTPP with GDP of £3,815bn, while Brunei is the smallest with GDP of £9bn. The other members are Canada (£1,335bn), Australia (£1,125bn), Mexico (£890bn), Malaysia (£280bn), Vietnam (£275bn), Singapore (£270bn), Chile (£220bn), New Zealand (£165bn) and Peru (£150bn). This compares with a forecast of £2,180bn for UK GDP in 2021.

Membership is not exclusive, with CPTPP members involved in a number of other multilateral free trade agreements. Canada and Mexico are also members of USMCA. Malaysia, Singapore, Vietnam and Brunei are members of the 10-nation Association of South East Asian Nations (ASEAN), which in turn has free trade agreements with Japan, Australia and New Zealand, China, India and South Korea. Mexico, Peru and Chile are members of the four-nation Pacific Alliance with Columbia. In addition, China is leading the formation of the Regional Comprehensive Economic Partnership which includes all of the non-Americas members of the CPTPP in addition to China, South Korea and the other members of ASEAN.

The CPTPP replaced the original proposal for a Trans-Pacific Partnership (TPP) that would have included the US, but the remaining nations decided that it was still worthwhile pursuing a revised trade arrangement even after the US withdrew its application four years ago. A new administration could see the USA change its mind and seek to join the CPTPP after all.

Why does the UK want to join a trade pact on the other side of the world? The immediate trade benefits are likely to be relatively modest given the distances involved and which are likely to be secured through bilateral trade agreements already under discussion.

One reason is likely to be geo-political, as membership would strengthen relationships with allies in the Pacific, advancing the UK Government’s ‘global Britain’ agenda. There may also be an advantage in being directly involved in the development of international trade policy in the Pacific region which contains the two largest individual economies in the world (the US and China), potentially influencing trade policy across the planet.

Of course, part of the motivation might be less about trade in the Pacific and more about trade across the Atlantic. After all, if the US were to join the CPTPP, the UK’s membership might provide a base from which to eventually develop a more comprehensive bilateral free trade agreement. This could fulfil a key strategic objective of improving trade ties with the USA by going around the world, albeit in a lot more than 80 days!

This chart was originally published by ICAEW.

ICAEW chart of the week: Government bond yields

11 December 2020: Ultra-low or negative yields provide governments with an opportunity to borrow extremely cheaply, but what will happen if and when interest rates rise?

Government 10-year bond yields

Germany -0.61%, Switzerland -0.59%, Netherlands -0.53%, France -0.36%, Portugal -0.02%, Japan +0.01%, Spain +0.02%, UK +0.26%, Italy +0.58%, Greece +0.60%, Canada +0.76%, New Zealand +0.91%, USA +0.95%, Australia +1.02%

On 9 December, the benchmark ten-year government bond yield for major western economies ranged from -0.61% for investors in German Bunds through to 0.95% for US Treasury Bonds and 1.02% for Australia Government Bonds, as illustrated in the #icaewchartoftheweek.

One of the more astonishing developments of the last decade or so has been the arrival of an era of ultra-low or negative interest rates, even as governments have borrowed massive sums of money to finance their activities. This is not only a consequence of weak economic conditions and the slowing of productivity-led growth, but it has also been driven by the monetary policy actions of central banks through quantitative easing operations that have driven down yields by buying long-term fixed interest rate government bonds in exchange for short-term variable rate central bank deposits.

For bond investors this has been a wild ride, with the value of existing bonds sky-rocketing as central banks have come calling to buy a proportion of their holdings, crystallising their gains. The downside is the extremely low yields available to debt investors on fresh purchases of government bonds, which in some cases involve paying governments for the privilege of doing so.

Yields vary according to maturity, with yields on UK gilts ranging from -0.08% on two-year gilts through to 0.26% for 10-year gilts (as shown in the chart) up to 0.81% on 30-year gilts. In practice, the UK issues debt with an average maturity between 15 and 20 years, so the current average cost of its financing is higher than that shown in the chart at between 0.48% and 0.77% being the yields on 15-year and 20-year gilts respectively. This has the benefit of locking in low interest rates for longer, in contrast with most of the other countries shown that tend to issue debt with an average maturity of less than ten years.

Quantitative easing complicates the picture, as by repurchasing a significant proportion of government debt and swapping it for central bank deposits, central banks have reversed the security of fixed interest rates locked in to maturity with a variable rate exposure that will hit the interest line immediately if rates change.

In theory, this should not be a problem, as higher interest rates are most likely to accompany stronger economic growth and hence higher tax revenues with which to pay the resultant higher debt interest bills, but in practice treasury ministers are not so sanguine. In leveraging public balance sheets to finance their responses to COVID-19 – on top of the legacy of debt from the financial crisis – governments have significantly increased their exposure to movements in interest rates, just as other fiscal challenges are growing more pressing.

Expect to hear a lot more over the coming decade about the resilience of public finances as governments seek to reduce gearing and reduce their vulnerability to the next unexpected crisis, whenever that may occur.

This chart was originally published on the ICAEW website.