Since June 23 we have seen a flurry of media hyperbole linked to BREXIT as they seize on any snippet of data to show all is well, though the Olympics seems to have distracted us of late. Economics is not called the dismal science for nothing and the one thing an economist needs is patience. This is an economy on slow burn, but it is burning.
Much was said about economists inability to predict the finical crash of 2007 and this was used to imply that predictions of the economy where systemically flawed. Of course what this fails to recognise was the context of that crash. Much money had been lent to individuals and corporations that had, or should have had, poor credit ratings. This debt was then passed off as being low risk. The market requires accurate data to price and manage risk. To predict this crash one would have needed a model that factored in that much of the securitised debt was miss represented – given that it was not known that this was the case that would be a perverse model. BREXIT is quite different. Here the risks are known and can be priced in and modelled.
So why did the economists get it so wrong, why aren’t we in a recession? Well I’m sorry to disappoint you, I appreciate it is comforting to think that experts are wrong and all that book learning is a waste of time, but the models were and are for BREXIT not BREXIT MAYBE. BREXIT MAYBE is happening right now. The first hit has been to the sterling. As predicted, uncannily exactly as Soros predicted, the pound hovers around $1.30. The impact of this is slow to work through but we have already seen it with fuel prices. Though the price of crude had crashed over the past couple of months, only to regain strength then fall again, the price at the pumps (after we have had to buy in dollars) has been static. Though fuel companies are often slow to pass on cuts even a fraction of the 20% cut in crude has been completely absent (my fuel today was 2p per litre dearer than June 23rd). It’s been good news for tourist coming to the UK though, and they have had a bit of a spree, but the impact on domestic consumption is a little slower to work through as stocks are run down and existing forward contracts exhausted. All the signs are that we are now entering a period of inflation that will result in a rise in the cost of living. This is directly caused by BREXIT MAYBE.
There was also some talk of a reduction in investment and of course every tiny bit of news that says a company will still invest has been trumpeted as proof that everything is fine. Whilst we have seen some companies ‘not stopping doing what they had already planned to do’ we have also seen some that have pulled back and held back on investment. This has a direct link to productivity which in turn links to wages, and coupled with the inflation we now see people can expect a fall in real wages over the coming years. Not one single company has declared that due to BREXIT they will now invest – only that they are now reconsidering.
Big infrastructure has taken a hit. Here the decisions are made based on long term expectations and so far the value of investment has dropped £5.8bn (https://www.theguardian.com/business/2016/aug/22/infrastructure-spending-nosedived-after-brexit-vote-figures-confirm), and investors are now expecting the Government to invest more to make up the shortfall. That’s the figure for just one month though. This fall is linked to investors’ long term expectations and that’s where a twist comes in….
We had been promised an emergency budget that would see tax rises and spending cuts but that was wrong too wasn’t it? Well not quite. A third option has been activated by the Government. If you can’t earn more and you can’t spend less you could always borrow more. Years of austerity aimed at a balanced budget have been swept aside as the Government promises to borrow more to prop up the economy, good news for the markets as someone is writing blank cheques, but long term? If debt wasn’t a problems what were all those cuts about? Which takes us to the Bank of England. The bank has cut interest rates and started printing money (again). Notice though that the cut hasn’t really been passed on to you and me? The equity markets are happy for five reasons. First they have time to restructure and relocate in an orderly fashion, remember they don’t like surprises as per the 2007 crash, secondly the BoE has started printing money, third the Government is writing blank cheques, fourth, and especially true for FTSE100, international companies earning foreign currency have seen their revenues rise in sterling equivalence just due to exchanges. Finally, and perhaps most importantly, the markets have settled down to the fact that the UK will accept some sort of Norway style membership with free movement and trade in return for a fee. They expect the British to do that British thing of being sensible after all the fuss. Settle down and be reasonable. This is the way the political narrative is going and looks to be the likely outcome, continued membership of a free trade area with free movement of people (with some sort of woolly worded sop to the rampant nationalists about emergency brakes).
(Just to give a little perspective the Dow Jones is the highest it has ever been whilst the FTSE100 and 250 are yet to regain the position they were in 12 months ago).
So all in all not too bad. Well not too bad for something that hasn’t happened yet. Actually that makes it pretty bad. The economy is slowing and we haven’t yet started, in fact we are at least three years off a position where we have to trade outside of full EU membership. We have no clear picture of what that may look like – though the markets expect something like Norway style deal. Investment in UK is slowing, the Government is upping its borrowing and the bank is printing money. And all of this before BREXIT – and the models were all predicting BREXIT not BREXIT MAYBE. You know that bit in a sci fi horror where the young recruit stands up and says “see it wasn’t so bad” just before an alien bites his head off? The economists are still sitting down.
Much was said about economists inability to predict the finical crash of 2007 and this was used to imply that predictions of the economy where systemically flawed. Of course what this fails to recognise was the context of that crash. Much money had been lent to individuals and corporations that had, or should have had, poor credit ratings. This debt was then passed off as being low risk. The market requires accurate data to price and manage risk. To predict this crash one would have needed a model that factored in that much of the securitised debt was miss represented – given that it was not known that this was the case that would be a perverse model. BREXIT is quite different. Here the risks are known and can be priced in and modelled.
So why did the economists get it so wrong, why aren’t we in a recession? Well I’m sorry to disappoint you, I appreciate it is comforting to think that experts are wrong and all that book learning is a waste of time, but the models were and are for BREXIT not BREXIT MAYBE. BREXIT MAYBE is happening right now. The first hit has been to the sterling. As predicted, uncannily exactly as Soros predicted, the pound hovers around $1.30. The impact of this is slow to work through but we have already seen it with fuel prices. Though the price of crude had crashed over the past couple of months, only to regain strength then fall again, the price at the pumps (after we have had to buy in dollars) has been static. Though fuel companies are often slow to pass on cuts even a fraction of the 20% cut in crude has been completely absent (my fuel today was 2p per litre dearer than June 23rd). It’s been good news for tourist coming to the UK though, and they have had a bit of a spree, but the impact on domestic consumption is a little slower to work through as stocks are run down and existing forward contracts exhausted. All the signs are that we are now entering a period of inflation that will result in a rise in the cost of living. This is directly caused by BREXIT MAYBE.
There was also some talk of a reduction in investment and of course every tiny bit of news that says a company will still invest has been trumpeted as proof that everything is fine. Whilst we have seen some companies ‘not stopping doing what they had already planned to do’ we have also seen some that have pulled back and held back on investment. This has a direct link to productivity which in turn links to wages, and coupled with the inflation we now see people can expect a fall in real wages over the coming years. Not one single company has declared that due to BREXIT they will now invest – only that they are now reconsidering.
Big infrastructure has taken a hit. Here the decisions are made based on long term expectations and so far the value of investment has dropped £5.8bn (https://www.theguardian.com/business/2016/aug/22/infrastructure-spending-nosedived-after-brexit-vote-figures-confirm), and investors are now expecting the Government to invest more to make up the shortfall. That’s the figure for just one month though. This fall is linked to investors’ long term expectations and that’s where a twist comes in….
We had been promised an emergency budget that would see tax rises and spending cuts but that was wrong too wasn’t it? Well not quite. A third option has been activated by the Government. If you can’t earn more and you can’t spend less you could always borrow more. Years of austerity aimed at a balanced budget have been swept aside as the Government promises to borrow more to prop up the economy, good news for the markets as someone is writing blank cheques, but long term? If debt wasn’t a problems what were all those cuts about? Which takes us to the Bank of England. The bank has cut interest rates and started printing money (again). Notice though that the cut hasn’t really been passed on to you and me? The equity markets are happy for five reasons. First they have time to restructure and relocate in an orderly fashion, remember they don’t like surprises as per the 2007 crash, secondly the BoE has started printing money, third the Government is writing blank cheques, fourth, and especially true for FTSE100, international companies earning foreign currency have seen their revenues rise in sterling equivalence just due to exchanges. Finally, and perhaps most importantly, the markets have settled down to the fact that the UK will accept some sort of Norway style membership with free movement and trade in return for a fee. They expect the British to do that British thing of being sensible after all the fuss. Settle down and be reasonable. This is the way the political narrative is going and looks to be the likely outcome, continued membership of a free trade area with free movement of people (with some sort of woolly worded sop to the rampant nationalists about emergency brakes).
(Just to give a little perspective the Dow Jones is the highest it has ever been whilst the FTSE100 and 250 are yet to regain the position they were in 12 months ago).
So all in all not too bad. Well not too bad for something that hasn’t happened yet. Actually that makes it pretty bad. The economy is slowing and we haven’t yet started, in fact we are at least three years off a position where we have to trade outside of full EU membership. We have no clear picture of what that may look like – though the markets expect something like Norway style deal. Investment in UK is slowing, the Government is upping its borrowing and the bank is printing money. And all of this before BREXIT – and the models were all predicting BREXIT not BREXIT MAYBE. You know that bit in a sci fi horror where the young recruit stands up and says “see it wasn’t so bad” just before an alien bites his head off? The economists are still sitting down.
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