Britain on the road less trav­elled

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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