Category Archives: Financial Markets

Banking, Britain, Economic, Financial Markets, Government

Brexit: Economic shocks can be positive

BRITAIN: ECONOMIC

A NO DEAL BREXIT would be an economic shock on the scale of quitting the gold standard for a second time in 1931, the 1967 devaluation of the pound and being ousted from the exchange rate mechanism (ERM) in September 1992.

But such shocks, if they trigger the right policy response, don’t necessarily have to be negative.

That is why it is fascinating that the Cabinet Office is now contemplating about what “Project After” Brexit actions should be.

It should come as no surprise, then, that both the Bank of England and the Treasury have similar thoughts.

In the immediate aftermath of the 2016 referendum to leave the EU, Mark Carney played a central role in shaping fiscal policy. Interest rates were cut by a quarter of a percentage point, a £60bn round of quantitative easing (QE) was launched and an emergency £100bn line of credit for the banking system was created.

In the event of a No Deal Brexit the Bank should be able to do more. Threadneedle Street is known to believe, however, that monetary easing becomes less effective with each successive episode.

Brexit poses more of a shock to the supply-side of the economy. That means fiscal and trade actions could be more effective.

The Government – and the Chancellor Philip Hammond – is in the fortunate position of having the fiscal space to act. The budget deficit has been dramatically reduced, but debt at 81.5pc of output, and falling, remains high. Compared to Italy, Japan and the US, it is far less threatening.

Post the financial crisis, markets are much more tolerant of debt, and low interest rates mean that it is more easily serviced.

What should the Treasury do? The case for speeding up infrastructure spending, particularly in the North, with HS3 across the Pennines a priority, is indisputable, as is the need for better and improved commuter routes into Manchester, Leeds and other northerly centres.

The most direct and easiest way of shoring up confidence would be to cut taxes. Corporation tax has already been reduced quite sharply to 19pc and is due to fall to 17pc in 2020. The reduction to 17pc could be made with immediate effect and it may be the opportunity to go even further, if not down to Ireland’s 12.5pc. Gaining a competitive edge is going to become increasingly prescient.

The best way of putting cash directly into the pockets of all consumers would be to lower VAT from the current 20pc back to 17.5pc, or even 15pc, on at least a temporary basis.

Most of the doomster predictions about Britain’s prospects post Brexit have related to international trade and shortages of vital imports such as pharmaceuticals.

 

DREDGING Ramsgate harbour might help. But within international commerce, money speaks the loudest. If Britain were to cut all tariff barriers and import duties to the bone, global enterprises would rapidly deploy their best logistical skills to make sure the shelves in NHS hospitals, pharmacies and supermarkets are fully stocked.

Such policies might seem extreme. One of the biggest concerns is that with parts of the economy already operating at near-to-full capacity, too much fiscal and monetary easing might unleash an inflationary bubble which would be difficult to burst.

Renewing and creating new infrastructure is the number one priority with new runways at not just Heathrow, but Gatwick, part of that.

But when, as Remain supporters like to say, the country is on a cliff-edge and social cohesion is threatened, it is important to think outside the box.

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Britain, Economic, Financial Markets, Government, Society

Brexit, oil prices and global trade: factors hindering economic recovery

ECONOMIC

DESPITE the uncertainties surrounding Brexit the range of expectations for UK growth for 2019 is relatively narrow – between 1 per cent and 2 per cent. A recent poll found that no economist expected an outright contraction next year; nor did any expect a boom. Rather, the most likely scenario is for growth of 1.5 per cent, which, the Bank of England believes, is around the UK’s new lower trend rate. The International Monetary Fund (IMF), which has also refreshed its global forecasts, expects roughly this same rate of growth in Britain to persist over the next five years.

The Brexit saga is probably the most obvious risk facing the economy. Whatever one’s view of the longer-term Brexit effect, a “no-deal” outcome could lead to the economy plunging into recession, while a “good deal” could boost confidence, investment and consumer spending and thereby economic growth. But Brexit is far from the only risk in town.

Indeed, there are plenty more global concerns that may yet scupper the recovery. After all, the British economy – unlike the United States and other relatively “closed” economies – is highly dependent on the outlook for global growth. And across much of the world forecasters see growth slowing over the coming years, even without some of the more disastrous risk scenarios crystallising.

What are the key global risks that might come back to bite the UK? First, there’s China. Many think of China as being a source of cheap imports but it is also Britain’s sixth largest goods export market. On one measure, published by the IMF, China overtook the US as the world’s largest economy in 2014, so attempts to reduce its debt pile after many years of spending could present a significant threat to global growth.

Fiscal largesse in the US is boosting growth there, but as President Trump’s splurge comes to an end the economic hangover could spread far beyond its shores. On this side of the Atlantic, the European Commission is likely to complain about the high budget deficits planned by Italy’s populist government, providing another source of market stress. Then there’s the issue of protectionism. Global tariffs have fallen significantly since the interwar period and remain low even after recent increases between the US and the EU/China. Even if these moves do not directly affect Britain, an escalation in trade disputes could yet be the precursor to weaker global confidence and exports, both to the UK’s detriment.

Oil prices could become a destabilising global force. Prices have fallen a little over the past few weeks but remain high at above $80 per barrel. Had strong global demand been the cause, that might have provided a counterbalance. But when prices rise because of supply constraints net oil importers such as the UK suffer increased costs with no improvement in demand conditions.

Higher energy prices also tend to leak into general price inflation. For now the inflation genie remains in the bottle, with rates of inflation across the G7 in a tight 1 per cent to 3 per cent range. But past above-trend rates of economic growth alongside unemployment rates at their lowest in a generation suggest upside risks to inflation. If not met with rising wages, that would reduce household spending power and could also prompt central banks to raise interest rates more quickly. Not only does that directly curtail domestic spending but for those countries that have taken out foreign currency loans (such as Turkey or Argentina) rising global interest rates push up their repayments and the risk of more widespread emerging market panic.

Recent moves in equity prices reflect all of these concerns; the FTSE 100 index fell to below 7,000 to a six-month low earlier this month. Investor concerns relate to the fact that neither central banks nor government exchequers can be sure their armoury is sufficient to deal with another crisis, should one arise. Banks may be more resilient now but they may not be the source of the next economic downturn.

Brexit is one of many global concerns that have increased the risks of another downturn in Britain and beyond. These risks will require careful navigation by policymakers if another downturn is to be avoided.

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Britain, Economic, Financial Markets, Government, Politics, Society

The real crisis of capitalism

ECONOMIC

THE past week has been a time for recalling the events of September 2008, their long shadow over the economics and politics of the past ten years and for drawing the right lessons for the future.

In particular, did the financial crisis prove that capitalism is fundamentally unstable and that a new model involving greater control and a much bigger role for the state, as favoured by Jeremy Corbyn’s Labour Party, is a better one? Or, the fact that the guilty men and women mainly got away with it, meant that public anger over the crisis was never assuaged?

We should understand that the financial crisis did not begin on the weekend of September 13-14, 2008, which saw frantic but unsuccessful efforts to save Lehman Brothers, the Wall Street investment bank. The crisis had been simmering for well over a year, a period that saw the run on Northern Rock and the start of Britain’s deepest recession in the post-war period.

The bankruptcy of Lehman, announced on September 15, turned a smouldering crisis into a ravaging forest fire that spread rapidly around the world. Banks were bailed-out by free-market governments using public funds. Alongside near-zero interest rates, central banks including the Bank of England did things they never would have contemplated in normal circumstances, most notably quantitative easing (or the printing of free money). Governments spent vast sums of money that ran into the billions boosting their economies to ease the impact of the crisis, but on the basis that they would cut back later. Austerity, on a scale and duration not seen in this country since the Geddes axe of the 1920s, was the course chosen by the coalition government in 2010.

 

MOST of what people think they know about the past decade is wrong. The danger in 2008 was of a prolonged period of deflation – falling prices and economic depression, a modern version of the 1930s. The reality is that both were avoided. After the shock of the crisis the economy grew more slowly than had been the norm, but it grew. All advanced economies were afflicted by weaker growth.

Income inequality in Britain has fallen since the crisis, not least because the burden of tax faced by the highest earners has increased. This financial year, 2018-19, the top 1% will pay almost 28% of all income tax, compared with just over 24% in 2007-08, paying £12bn a year more in tax than before the near meltdown. The top 10% accounts for 59.7% of all income tax revenues, up from 54.3%.

Austerity, as practised by the coalition led by David Cameron and now by a Tory minority government under Theresa May, was never about shrinking the size of the state for ideological reasons. The coalition’s mantra before the crisis was that after the spending splurge under Gordon Brown, the “proceeds of growth” would in future be shared between tax cuts and increased public spending.

Even faced with the task of reducing an out-of-control budget deficit, Mr Cameron ring-fenced NHS spending and imposed a target of spending 0.7% of gross national income on foreign aid. A better criticism of Tory austerity is that too much of it involved cuts to government investment and that the process has dragged on for too long, partly because it was leavened with tax cuts, mostly for working people.

 

THE financial crisis and its aftermath were painful but too many Tories seem to have been cowed by it from making a robust case for capitalism. This leaves the way open for Jeremy Corbyn and John McDonnell, Labour’s anti-capitalist chancellor. When a privatised rail company messes up, or a housebuilding boss is awarded a bonus running into tens of millions of pounds, there is rightly an outcry. The crisis itself was the product, yes, of many greedy bankers and a few in handcuffs might have satisfied public opinion, but it was also the consequence of regulators whose job it was to stop them failing. In many cases, including the recent collapse of Carillion, many of these problems arise at the interface between the public and private sector.

Of course, we all want to return to a time when living standards are rising at a decent pace. That will be achieved only when productivity growth also returns to something approaching past norms. Capitalism in Britain has, since the crisis, delivered something like seven times the number of new jobs as those cut by the public sector. Unemployment is at its lowest since the mid-1970s. It is the private sector, not failed prescriptions of anti-capitalism, that will deliver prosperity in the future.

 

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