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It has been a torrid couple of weeks for the pound. A growing expectation that the UK is heading out, not just of the EU, but of its single market, has led to a further lurch down in the value of the pound. Against a basket of currencies sterling came close to its lowest ever level last week. Last Friday it was trading at $1.22, down 16% from pre-referendum levels.
The renewed slide in the pound started earlier this month with the Prime Minister’s speech to the Conservative Party conference. Mrs May seemed to rule out accepting continued free movement of EU nationals in return for access to the EU’s customs and duty free Single Market saying, "We will do what independent, sovereign countries do. We will decide for ourselves how we control immigration. And we will be free to pass our own laws."
For me the surprise was not what Mrs May said but the foreign exchange market’s reaction to it. The Leave vote has handed the government the task of securing an exit from the EU that is saleable to the UK electorate. Leaving the EU and staying inside the single market, the course that is minimally disruptive, would leave the UK subject to free movement of EU nationals and EU regulations over which it has no control. For much of business sector this is the next best thing to staying in the EU.
But would it work politically?
Prime Minister David Cameron didn’t think so. In a speech a year ago he ruled out the so-called Norway option, pointing out that outside the EU Norway pays twice as much per head into the UK as the EU, accepts free movement of EU nationals and all regulation but, “with no seat at the table, no ability to negotiate”.
Markets have, belatedly, locked onto the political forces at work and the likelihood that the UK will leave the single market. A weaker pound is the mechanism through which market view on the effects of Brexit is expressed.
That view is downbeat. A weaker pound will certainly fuel inflation and squeeze consumer spending and growth in the medium term. The UK could lose chunks of its high value finance sector to Europe. Some argue that the UK’s manufacturing sector is too small and orientated to selling in Europe to fill the gap by raising exports. Outside the Single Market the UK will, many fear, trade less and become more insular. The pound is falling because foreign exchange markets believe that the UK will become a slower growth economy. This conforms to the widespread, though not universal, view among economic forecasters before the referendum, that leaving the EU would reduce UK growth in the long term.
The US economist Nouriel Roubini, nicknamed Dr Doom for forecasting the financial crisis, summed up what he saw as the UK’s predicament thus: “the risk is not that the U.K. has a recession of two-three quarters; the risk is that the U.K. will stagnate at 1 percent growth for the next five years.” In a similar vein the Economist newspaper, a firm critic of Brexit, reiterated its view in an article last week entitled, “Brexit will make Britain poorer and meaner”.
There are other possibilities.
The latest Deloitte survey of UK Chief Financial Officers, released this morning, reveals that three months on from the EU referendum Brexit risks continue to loom large for the UK’s largest corporates.
The period since the previous CFO Survey, carried out in the immediate aftermath of the referendum vote, has seen Mrs May’s appointment as Conservative Party leader, a strong rally in equity markets and a run of solid UK and global economic data.
For much of the post-war period, the ideas of British economist John Maynard Keynes held sway in Western Finance Ministries and Central Banks. Keynes believed that government should manage the economy using fiscal policy – public borrowing, spending and taxation.
One of the biggest headaches for Britain's new government is raising productivity. Productivity, or the efficiency of production, is the main driver of human welfare. Raising it is the Holy Grail of economic policy. As Paul Krugman, the economist and Nobel laureate put it, "Productivity isn't everything but in the long run it is almost everything".
Globalisation has been a conspicuous casualty of the global financial crisis and its aftermath. In recent years the two engines of globalisation, growth in international trade and capital flows, have lost momentum. In the West globalisation is routinely blamed for job insecurity, inequality, low incomes and over mighty multinationals. Politicians of left and right increasingly represent trade as a threat.
Is the world getting worse? 71% of Britons polled by You Gov last year thought so. Only 5% thought it is improving. News headlines tend to confirm the impression of a world that is riven with conflict, poverty and danger. Most Britons and Americans think world poverty is rising; in fact it has halved in the last 20 years. When we think about the risks of flying we tend to think of recent air crashes. Few of us know that since the 1970s the number of passengers has risen ten fold and the number of accidents and fatalities has halved.
Economic news tends to attract less media coverage and less public interest over the summer. Understandably, journalists, and their audiences, have holidays on their minds. Yet economics is no respecter of seasons and data and events have continued to pile up.
With the summer holidays drawing to an end here's our two-minute take on what happened in July and August.
With the holiday season in full swing London is always quieter at this time of year. Certainly not as quiet as Paris, where, famously les grande vacances mean that much of the country takes August off, but still quieter than usual.
As the summer holidays approach their end, this week's Monday Briefing examines the winners and losers in terms of holidays and working time.
The global financial crisis has brought in an era of low interest rates. Eight years on from the onset of the crisis growth remains subpar and interest rates have drifted lower still, sometimes into negative territory.
In their search for new ways of boosting growth some central banks have set interest rates below zero. The European Central Bank (ECB) became the world's first central bank to do so in 2014. Denmark, Sweden, Switzerland and Japan have followed the ECB and introduced negative rates.
Sentiment about emerging markets is prone to big swings. From the late 1990s optimism, bordering on euphoria, was the order of the day. That bubble burst more than five years ago. Since then, but with some conspicuous exceptions, sentiment about emerging markets has become increasingly negative.
China's long-term slowdown, widespread political turmoil, falling commodity prices, and the withdrawal of capital by foreign investors have all played a role. Emerging market equities have taken a hammering and growth has softened.
Gross Domestic Product (GDP) is the broadest and most ubiquitous measure of economic performance. But as a gauge of human welfare it is wanting. Many factors which contribute to welfare fall entirely or partially outside GDP.
Worse still, many things which contribute to unhappiness - such as crime, pollution or poor health - can raise GDP, at least in the short term.