EU referendum - some thoughts

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Pretty much everyone agrees that the UK's referendum has put us into a world of uncertainty and elevated risk. For once the use of the term "Earthquake" in the headlines was not hyperbole.

Saying that things are "uncertain" is obvious but not very helpful.  Quite naturally theories, speculation and forecasts multiply.

Some argue that since the referendum vote was only advisory, 70% of MPs favour Remain and some Leave voters seem to be suffering buyers' remorse, the UK will never leave the EU. Others think that the EU will seek to minimise uncertainty and send a message to other Brexit-inclined movements in Europe by hustling the UK out as quickly as possible.

There are plenty more theories, most of which, like the bookies odds and the opinion polls before the referendum, will probably prove wrong. What follows therefore aims to be rather less speculative.

As a shock Brexit has some elements in common with the failure of Lehman Brothers in 2008. That was an economic shock, one which threatened the solvency of the banking system and triggered a credit crunch. Brexit is a political shock. Its impact on the economy is more indirect, at least in the short term, and come via financial markets and the knock on effects on business and consumer confidence.

Friday saw a flight from riskier assets, such as sterling and equities, to safer assets such as gold, government bonds, the yen and the dollar. If sustained, declining financial market risk appetite tends to feed through to weaker risk appetite in the corporate sector. Companies react by battening down hatches, paring investment and sharpening their focus on cost control.

Foreign investors may also take fright and hold back on investing in the UK. Since the UK needs overseas capital to cover our current account deficit, the result of such a buyers' strike would be a further weakening of the pound.

To generate a full-blown recession consumers, who account for two-thirds of GDP, would need to stop consuming, as they did in 2009-10. The worry is that a toxic combination of uncertainty and a squeeze on spending power from high inflation and weaker earnings does just that.

If Friday's sell-off in equities and sterling was a prelude for worse to come this week the risk of greater economic damage mounts.

One of the lessons from history, including the 9/11 attacks, the UK's ejection from the Exchange Rate Mechanism and Lehman's failure, is that shocks which threaten growth prompt a countervailing policy response. The authorities don't sit on their hands and do nothing.

Today the most useful response would be for the government to signal the direction of travel for the UK in its negotiations with the EU. In markets and business as in life, intent matters. With the Prime Minister stepping down in October and the current Labour leadership under pressure, the two main parties are not well placed to offer leadership. Nonetheless, the government could work with the other parties and the likely contenders for the Party leadership to develop a set of principles for a post-EU settlement. Sajid Javid, the Business Secretary, gave some indications of his preferences in a short article in yesterday's Sunday Times. In it he emphasised the need for the UK to remain an open, trading economy and to involve all shades of business opinion, whether they favoured Remain or Leave, in fashioning the post-EU settlement.

The usual policy levers could also be pulled. The Bank of England could undertake more Quantitative Easing, stepping up the volume of and the range of assets purchased to boost liquidity and asset prices and drive down long-term interest rates. Agreed, inflation may head higher as a weaker pound pushes up import prices. But as a one-off phenomenon in an economy facing great uncertainties, such a temporary inflation would not justify interest rate rises. 

Fiscal policy may need to play a role too. The Chancellor has previously suggested Brexit would lead to an austerity budget in order to balance the books. That would dent growth and might well be politically unviable given opposition from many MPs. In today's exceptional circumstances the government could put deficit reduction on the back burner and use public spending and tax cuts to bolster growth. Such an approach has particular appeal to those who believe that monetary policy is a spent force.

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Posted on 27/06/2016

EU referendum - everything you need to know (except the result)

Monday Briefing EU

Voting in this Thursday's UK referendum on membership of the EU takes place between 7am and 10pm. Unlike last year's General Election there will be no official exit polls, partly because of the difficulty of extrapolating from a sample to a wider population in a referendum. Nonetheless, the Financial Times reports that some hedge funds have commissioned their own exit polls in order to trade on early indications of the result. The movement in the value of sterling during the count of votes from 10pm on Thursday evening will provide one signal of market sentiment about the outcome.

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Posted on 20/06/2016

Equities in a slower growth world

Monday Briefing Equities
One of the most frequently quoted pieces of investment advice is that equities are a good long-run investment.

The argument runs that for all the ups and downs of the stock market equities outperform other assets, such as cash or government bonds, in the long term.

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Posted on 13/06/2016

Growth in Europe, minding the gaps

Monday Briefing growth and trade
One longstanding aim of the European project is to foster economic convergence and to improve economic performance in low income economies. At its simplest convergence enables poorer countries to catch up with richer ones, helped by improved cross border trade, capital flows and population movements.

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Posted on 6/06/2016

Demographics isn't destiny

Monday Briefing City
Western policy makers have been grappling with the global economic crisis and its legacy for eight years. Slow growth, deflation and austerity risk becoming the 'new normal' for many countries. Faced with such pressing threats it is no surprise that profound, long-term shifts in the economy and in society are getting less attention.

Demographic change is one such issue.

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Posted on 31/05/2016

Polls vs Punters

Monday Briefing Punters
Last week's opinion polls and bookmakers' odds show a much diminished likelihood of a UK exit from the European Union.

The average of the last six opinion polls show that, excluding Don't Knows, Remain is on 55% and Leave on 45%. That is the biggest lead for Remain in three months. The bookmakers' odds have moved even further. At the end of last week they were pricing in just a 22% chance of Brexit, the lowest reading in a year.

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Posted on 23/05/2016

Low-key growth

Monday Briefing growth2

We start this week's Briefing with a question. In which region or country – the US, Japan, euro area or the UK – have expectations for GDP growth remained most robust over the last year? A clue: it saw the fastest GDP growth in the first quarter of this year.

The answer is the euro area. The outlook for the US, Japanese and UK economies has deteriorated markedly in the last year while euro area growth expectations have seen only modest downgrades.

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Posted on 16/05/2016

Latest news vs the long view

Monday Briefing News
Forecasting is, as we observed in last week's briefing, a perilous business. To stand a chance of being right about the future you need to understand where you are now.

So it makes sense to pay attention to what the latest data and news are saying. Certainly economists and journalists pore over every new piece of data looking for signs of where the economy is heading. 

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Posted on 9/05/2016

How to be a better forecaster

Monday Briefing Forecast
It is not hard to think of recent events that have taken experts by surprise. From Donald Trump's success in the Republican presidential primaries to Jeremy Corbyn's election as leader of Britain's Labour Party the last year offers plenty of examples of insiders getting it wrong.  Pollsters, regulators, intelligence experts and, of course, economists, have suffered reputational setbacks in recent years as the future failed to conform to their theories and expectations.

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Posted on 3/05/2016

Brexit and the opinion polls

Monday Briefing Opinion Polls
Last week was a good one for the 'remain' camp in the UK's EU referendum campaign. The Treasury published an analysis of the economics of leaving the UK which concluded that a Brexit would involve significant net costs for the UK. Later in the week US President Barack Obama warned that outside the EU the UK would be "at the back of the queue" for a trade deal with the US.

But where does public opinion stand?

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Posted on 25/04/2016

Technology optimists and pessimists

Monday Briefing Technology
Last Wednesday evening the House of Lords held a 90-minute debate on a Deloitte research paper, published last summer, entitled Technology and people: The great job-creating machine Written by myself and my colleagues, Debapratim De and Alex Cole, the paper examining census data for England and Wales since 1871 to track the relationship between technological innovation and the destruction and creation of jobs.

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Posted on 18/04/2016