Britain on the road less travelled
The financial apocalypse that analysts were promising if Britain voted for a Brexit has not yet come to pass, although everything remains up in the air. Scaremongering tactics were used on a widespread basis by the pro-remain campaign to dissuade UK voters from making a ‘foolish’ decision. Now that the vote has come and gone, and Britons voted 52% – 48% in favour of a Brexit, there is going to be a price to pay. But nobody knows precisely what the cost will be just yet. What is known is the political chaos that has erupted in Westminster. One voice has emerged as the voice of reason in and among the chaos, and it is that of Bank of England Governor, Mark Carney.
To assuage the concerns of Britons, and investors across the world, the BoE has indicated that it is fully prepared to implement rate cuts as soon as July 2016. This is especially significant during this period of time. It is already accepted that there are limitations to what a central bank can do during highly volatile economic times. However, there is a little wiggle room that can be manipulated to try and bring a smidgen of stability back to the UK economy.
Among others, Bank of England Governor Mark Carney has indicated that quantitative easing measures would be implemented post-haste to try and calm market fears, and stabilise the UK economy. The political spectrum in the UK has been fraught with uncertainty following the shock decision to break from the EU.
Prime Minister David Cameron announced that he will be stepping down in October. More importantly, he has decided not to touch the political hot potato of a Brexit. He will leave that to his successor – whomever that may be. In order to initiate Britain’s extrication from European Union, article 50 of the Lisbon treaty will have to be invoked. The entire political elite in the UK is in upheaval. It spans the Treasury Department under George Osborne to the Prime Minister’s office at 10 Downing Street.
What is absolutely clear at this juncture is that economic stability must be returned to the United Kingdom, irrespective of what malarkey is going on in the political echelons. There is widespread consensus among economists, analysts, speculators and policymakers that a Brexit is not good news for the UK economy. The big question is whether the Governor of the Bank of England can arrest further declines with a series of expansionary monetary policy measures.
In times of financial uncertainty, a worrying phenomenon on typically takes effect, and it is known as delays in big ticket purchases. This happened in Japan and across Europe as recessionary fears start to sink their teeth into the economy. With employment prospects plunging and investment sinking, business and private sector adopt a wait-and-see approach. This invariably decreases overall economic activity and feeds a recessionary climate. However, Carney is not of the opinion that this period in history is a rerun of the Lehman Brothers saga in the US.
Business leaders roundly rejected the idea of a Brexit. Indeed, a letter was inked by 1,200 high-level business leaders in the UK voicing their opposition to a Brexit. Now that the vote is over and the advisory results are in, business is encouraging politicians to work together in a bipartisan manner to come up with constructive solutions to the pressing concern of the UK economy. There is no easy way to tackle the Brexit issue.
Now that UK politicians have vowed to abide by the vote, it is going to prove especially difficult untangling the decades-long union between the UK and the EU. Trade agreements will have to be broken and reworked and a new institutional framework will need to be adopted. Prior to the Brexit referendum, the UK economy showed declining GDP figures with 0.4% decline in Q1 2016. This was 0.7% lower than Q4 2015. The income inequality between lower and middle income households in the UK is especially worrying. This was one of the hotbed issues that factored into the vote.
The UK Chancellor of the Exchequer, George Osborne certainly had his work cut out for him with regards to austerity measures. He has to balance the dual objectives of cutting spending while maintaining a safety net for those who are most vulnerable in the UK. People across the UK are seeking improved prospects, especially in the cities. But more importantly is the need to increase living standards in the UK. The hourly wage has barely increased, and gains across the UK are not being shared equally. There is a dire need to improve productivity, and employment prospects in the UK. To this end, there are striking skill shortages that are hampering economic growth in the country.
Mark Carney will have to walk a careful line alongside the Monetary Policy Committee of the Bank of England. The response that he adopts will have to be sensible and growth oriented. That he made it clear that quantitative easing measures would be adopted in the summer months, as early as July 2016 is significant. The problem is that we simply don’t have sufficient economic data to determine what policies need to be adopted at this juncture. Retail sales information, employment data, manufacturing and the like will only be released towards the end of July, perhaps midway through August 2016.
Monetary policy needs to be implemented based on economic realities, not supposition and not conjecture. Interest rates in the United Kingdom are already at historically low levels at just 0.50%, and interest-rate cuts will only have a limited effect on the GBP and the UK economy. Had the UK interest-rate spin above 1%, perhaps higher, the impact of a rate cut would be more profound. For this reason, monetary policy alone is incapable of writing the wrongs of an economic downturn.
Having said that, there is no guarantee that rate cuts will generate the type of responses in the UK economy that leaders are seeking. If a loss of confidence in the Bank of England takes place, there will be no alternative remedy, say fiscal policy, to get things back on track. The hawks in the establishment and the doves are at loggerheads with one another. The shock referendum result has thrown a cat among the pigeons and nobody is quite sure which way things ought to be going just yet.