Across the Western world, government bond yields are plunging. On-going slow growth and the spread of negative interest rates among the G7 nations are sending alarming signals to those with the presence of mind to notice and the ability to understand.
Financial markets are riven with nervousness, amidst widespread cash hoarding. All of this had been happening – explicitly or below the surface – for years. It has nothing to do with Brexit.
New figures show the global PMI index – a bellwether indicator of world economic activity – just suffered its weakest quarter since the end of 2012. Yet the index has been below its long-run average for the last ten months in a row. So that, too, has little to do with the UK voting to leave the European Union.
It’s over a fortnight since Britain held its historic referendum. Since then, financial markets have been volatile and the pound has fallen. Given how these developments have been reported, the general public might conclude all the financial woes of the UK, of the entire world in fact, stem from our decision to vote Leave.
No matter that actually quitting the EU will likely take at least two years – and possibly longer. No matter that, until then, trade agreements and commercial regulations don’t change. No matter, either, that the main UK share index has performed rather well since 23rd June – certainly compared to its Eurozone counterparts. As negative financial developments are dwelt-upon, emphasized and trumpeted, positive news is largely ignored. Every drop in sterling, every share blip, every deal delayed is linked to “fears of Brexit taking hold”.
Some 17.5m of us voted to leave the EU. That’s more British people than have ever voted for anything, ever. Despite this mighty display of democracy – and the slim but still decisive 1.5m-vote margin of victory – there are many, not least among the media classes, arguing for this “advisory” vote to be overturned or even ignored.
For them, financially volatility seems welcome, providing “proof” that Leavers were “stupid” and “wrong”. To take such a view is in part a cynical attempt to transgress democracy – in a manner that’s highly divisive and deeply irresponsible. It’s also utterly to misunderstand what is actually happening on global markets and why.
At the time of writing, the FTSE-100 is around 4pc higher than its closing price on referendum day – at which point, the overwhelming consensus was that Britain would vote Remain. Yes, the FTSE-250, which reflects more UK-centric firms, is 6pc lower than when we voted. But the same index is still 4pc above its February low – when, again, almost all the “smart money” assumed Britain would stay in. The CAC-40 – France’s top share index – is meanwhile down over 7pc since our Brexit vote, , as is Germany’s Dax-30. Italy’s FTSE MIB has tumbled no less than 15pc. These countries, of course, haven’t opted to leave the EU. Yet their stock indices have performed worse than ours.
The pound is certainly sharply down since the referendum, trading around 10pc lower against the dollar. One reason is that, as pundits and pollsters wrongly convinced themselves Leave would be trounced, sterling was marched to a wholly unjustified high. Unwinding such a “one-way bet” was always going to produce a violent counter-reaction.
But guess what? The UK has a record current account deficit – equivalent to almost 7pc of GDP. While a lower pound isn’t without downsides, a bit more competitive advantage our exporters is welcome. Britain’s public finances, meanwhile, remain a sea of red ink. Government borrowing during April and May alone approached £20bn, higher than during the same period last year. So there are many fundamental reasons why the pound should fall – reasons this Brexit vote has exposed rather than caused.
A very sharp fall in sterling is alarming, though, with the potential to cause panic – not to mention a nasty inflation spike via higher import prices, particularly with oil prices on an upward trend. It would be better if the pound adjusted gradually, so lowering the risk of a destabilizing overshoot. That’s why I’ve been concerned at recent statements from the Bank of England.
A week or so after the referendum, sterling appeared to be stabilizing. Then, the Bank unexpectedly announced that UK interest rates could soon be lowered. As a result, City analysts now put an 80pc chance on rates being cut this summer from their already historic low of 0.5pc – where they’ve been since March 2009, having been slashed to emergency levels in the aftermath of the sub-prime collapse. Some think we’ll see two reductions of 0.25 percentage points, with rates falling all the way to zero. There is also talk of the Bank creating tens of billions of pounds of extra money, in an extension of quantitative easing.
Given all that, is it any wonder the pound has fallen so sharply? The prospect of lower interest rates and more turbo-charged money-printing is bound to cause sterling to plunge. For years, many of the world’s biggest economies have been engaged in “currency wars”, using QE to expand their base money supplies in an attempt to depreciate their currencies, lowering debt burdens and boosting international trade.
It’s not surprising, given how the markets failed to spot Brexit coming, that the pound has recently weakened. But this deeper fall over the last week has much more to do with the prospect of even looser monetary policy than our future plans to leave the EU.
Is the Bank now also taking part in currency wars, using the cover of this Brexit vote to drive the pound as low as possible? Do policy-makers not see that that squashing rates down to zero – making borrowing costs negative after inflation – only serves to undermine the UK’s already extremely fragile banking sector? That’s one reason why financial markets could easily conclude that such extreme measures, far from stimulating the economy, could actually cause a contraction.
Believe it or not, the UK economy is not doing badly. Figures released last week showed industrial production, despite huge pre-referendum doom-mongering, up 1.9pc during the three months to May. That’s the strongest performance for six years. Yet the Bank of England is now about to unleash even lower interest rates and more QE? This seems to me entirely reckless.
Emergency measures were needed after the 2008 collapse. Yet the £50bn of QE initially advertised has expanded to £375bn – with more now apparently to come. It’s this kind of grotesque liquidity expansion that has, in recent years, driven up asset prices across the Western world and significantly sharpened inequality. That’s why bond prices have ballooned, driving yields to historic lows. Such developments reflect neither confidence nor optimism about future earnings, representing instead yet another bubble caused by monetary authorities doing the bidding of their myopic political masters. This bubble will surely burst. And when it does – that, too, will have nothing to do with Brexit.
What post-referendum Britain now needs, desperately, is political leadership. The Tories must choose their leader, our de facto Prime Minister, sooner than mid-September. I’m not arguing for a “coronation” of Theresa May – but if Tory constituency members are to have their say, hustings can surely be speeded up.
August can be a wicked month, not least on financial markets. With Italian banks sitting on massive bad debts and Deutsche Bank shares at a 30-year low, the Eurozone is a cauldron of systemic dangers – which, again, have nothing to do with Brexit. If traders panic, and chaos ensues, a leaderless Britain would be hammered nonetheless.