Global Issues Post A Greater Risk Than Brexit

It’s been another bad week for “Remoaners”. Those who warned the UK economy would nosedive if we voted for Brexit faced another wave of broadly favorable data.

Since the UK’s historic referendum in June, the widely-threatened Brexageddon hasn’t happened. On the contrary, consumer confidence has rebounded, retail sales are up and the housing market has remained firm – pleasing homeowners while further exasperating first-time buyers.

The FTSE-100 index of leading shares has surged 15pc and the more UK-focused FTSE-250 is 4pc above its pre-referendum peak. There’s no sign of George Osborne’s “punitive tax-raising emergency budget” – or even of George Osborne – and the state pension remains in tact.

Newly-published survey data last week suggested the UK’s vital services sector – accounting for over three-quarters of the economy, from finance to restaurants and hospitality – enjoyed a soar-away summer. In August, booming exports and domestic tourism generated the biggest monthly rise in services activity for 20 years. And that followed data showing manufacturing at 10-month high.

“Much of the gloom and fear-mongering has been proven wrong,” Brexit Secretary David Davis told MPs last week, clearly enjoying his first outing at the Commons despatch box for almost a decade. The “continental experts” who warned of post-Brexit meltdown “have oeuf on their face” quipped Former Justice Secretary and fellow Leave campaigner Michael Gove, speaking from the backbenches.

Such political knockabout is inevitable and – for pro-Brexit economists like me – quite enjoyable. The truth is, though, it’s far too early to judge the economic impact of the UK quitting the European Union. It could be mid-2017, or even later before the government triggers “Article 50”, launching formal exit negotiations. And we’re unlikely officially to leave until 2019 or beyond.

It’s important, in the meantime, not to talk down the economy unduly – as many Remain campaigners have been. And unless Brexiteers counter mischievous attempts to spread economic alarm, the Remoaners will continue to play on public fears, agitating for a second referendum – which would, in my view, be a dangerous transgression of democracy.

Objectively speaking, though, while the latest survey data are legitimate and welcome, we’ll have to wait until October 25 for the first official estimate of post-referendum quarterly GDP. And business investment numbers for the same period – arguably even more important when judging our medium-term prospects – won’t be available until the end of November.

While Brexit has dominated British politics for the last six months, and will do so for some time, there are many more important issues when it comes to assessing the future path of the UK and the broader global economy.

On the plus side, Britain is well placed to benefit from the growth-boosting effects of various on-going technological advances – be it in the field of information technology, manufacturing technology, bio-tech, energy-tech or fin-tech (the use of technology to make financial services more efficient). The economy will also continue to gain from immigration – for, even after Brexit, when the UK government controls labour flows from the EU as from elsewhere, net inward migration will remain significant.

Set against those positives, Britain is shouldering a current account deficit close to 7pc (although a weaker pound might help) and a fiscal deficit of around 5pc of GDP. Both are dangerously high – and, despite widespread complacency, could yet spark systemic instability. The UK also remains extremely vulnerable to an implosion of the ever-fragile eurozone – whether sparked by an Italian banking crisis, failed negotiations relating to on-going Greek bail-outs or some other “black swan”.

Then, of course, there’s the looming issue of the world’s leading central banks weaning financial markets off ultra-low interest rates and quantitative easing. Across the world, stock and bond prices remain pumped-up to unrealistically high valuations courtesy of several trillion dollars worth of printed money – be it from the Federal Reserve, the European Central Bank, the Bank of Japan or elsewhere.

The answer to kicking the QE-habit and ultra-low interest rates clearly isn’t yet more QE and even lower rates. That seems to be the policy, though, of the Bank of England. Governor Mark Carney last week defended himself against complaints his pre-vote anti-Brexit warnings were overdone – which they were – by saying the Bank’s “timely, comprehensive and concrete” actions since have “supported, cushioned and helped the economy to adjust”. This strikes me as dubious.

It was only in August that the Bank cut rates from 0.5pc to 0.25pc, while pledging to purchase another £60bn of government bonds over the next six months, on top of the £375bn of QE already implemented since March 2009. It’s extremely unlikely this did anything to influence the real economy in August. Monetary policy, as Milton Friedman taught us, works with long and variable lags. Seeing as only around a third of UK households have mortgages, and over half of those are fixed rate, even the long-term impact of lower rates could be minimal – not least as crass lenders seem determined not to pass on the cut.

In fact, given that the Bank lowered rates when the economy was actually doing quite well, and broad money had, during the previous quarter, grown at a buoyant 14.7pc annualized rate, there’s a growing school of thought this rate cut was technically mistimed. That’s on top of all the more general concerns that QE is a busted flush and, while further hyping-up equities and bonds, is doing more harm than good.

While Brexit and QE are the subject of endless press commentary, the really big issues affecting all our economic futures can be summarized under the heading of “geopolitics”. Such matters barely get the attention they deserve – even in the aftermath of last weekend’s G20 summit, which was to geopolitics what Woodstock was to rock.

It’s widely recognized many Western voters are angry about “rising inequality” and “being left behind by globalization”. Such concerns explain, in the minds of some, not just the UK’s Brexit vote but the rise of “anti-establishment” politicians worldwide, including Republican Presidential nominee Donald Trump.

Far less commented upon are the increasingly fraught relations between Eastern and Western nations, and the potential for future protectionism and (heaven forbid) more serious forms of conflict. Such trends, if they continue, will undermine global trade – and broader economic growth – to a very serious degree.

A major flashpoint, of course, is the martime dispute between Washington and Beijing, relating to the battle for influence in the South China Sea. Seemingly remote, some $5.3 trillion of goods cross this vital body of water each year – no less than 70pc of all sea-borne freight globally. No economy in the region will do well unless the on-going battle for control between America and China remains relatively calm.

There are increasing signs that it won’t. In July, an international court ruling in the Hague rejected China’s claims to almost all of the South China Sea, in a case raised by the Philippines. Beijing has denounced the verdict – and said it will continue to “reclaim” islands, with a view to build military bases, while warning the US to “respect Chinese influence” in the region, most recently at the G20 summit.

Barack Obama bade farewell to G20 leaders last week by reminding them “we live in turbulent times”. The out-going US President wasn’t kidding. For it’s rising protectionism and potential geopolitical conflict – not Brexit – that casts the darkest cloud over all our economic futures.

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