Why markets are a step ahead

TRADE wars such as Donald Trump’s spat with China are never good, hurting all sides – or so conventional wisdom holds. As for Brexit, putting politics aside, most in the City agree it too cannot be good in economic terms – hurting both the UK and the EU.

So why, despite widespread acceptance of these messages, are financial markets so upbeat?

The S&P 500, the largest US companies, keeps hitting new highs. Meanwhile, the pound is actually a bit stronger than it was a month ago against both the dollar and the euro, even after falling sharply on Friday.

This, despite the apparent deadlock over the Brexit negotiations and the threat of disruption ahead.

Of course, it could simply be that markets – and the powerful forces shaping them – are deluded. We have plenty of experience of that, not least with two major crashes since the turn of the Millennium. But there is another more encouraging message here, which is that the world economy is actually pretty tough.

The great web of companies, investors and workers who make it up are good at adapting to political upheavals, just as they are good at responding to changes in tastes, in technology, and in global economic relations.

Faced with potentially seismic changes in global trading relations, it follows that countries should do what successful economies have always done: adapt but also focus on what they are good at.

In the case of the UK, we have clear areas of competitive advantage. One is top-end manufacturing. We have had an example of that last week in the proposed flotation of Aston Martin with a value of more than £5 billion, which would put it ahead of Ferrari.

Manufacturing matters, which is why we should take seriously the warning of Ralf Speth, chief executive of Jaguar Land Rover, of a no-deal Brexit. He said it could cost the company £60 million a day and has put many staff on a three-day week.

Or take higher education. On the QS rankings of top universities out earlier this month, the UK had four in the top ten: Cambridge, Oxford, Imperial and UCL. The highest ranked university in the rest of the EU was Université PSL in Paris at number 50. Other rankings tell a similar story.

Rankings are only one measure, but they give a consistent message. A rational policy would be to support our universities as a great export industry, which they are, as well as a conveyor belt of talent and innovation feeding our economy, from ground-breaking new medicines to life-changing gadgets. Instead, we get bound up with concerns about student visas. Or take finance. One of the things that astounded Mark Carney when he came to take over the governor job at the Bank of England was the hostility in this country towards financial services.

He has never met anything like it elsewhere. Our Government should not try to protect financial institutions for their misbehaviour, any more than the German government should protect its carmakers for lying about toxic emissions.

But when you keep getting rung about claiming compensation for payment protection insurance you were never sold, or for whiplash in a car accident you never had, you know something rum is going on.

I looked up the figures for foreign trade in financial services last year.

Our exports were £59.6 billion; imports were £15.3 billion. The surplus was £44.3 billion. Finance is our most successful export industry by a huge margin. Against that backdrop our banks, as Barclays chairman John McFarlane argues in The Mail on Sunday today (Page 97), must be supported.

There are many other success stories on these shores – including the fashion, creative and entertainment industries – but the big point here is that all countries have beacons of strength, things they are really, really good at. They trade with each other to exchange this excellence.

Politicians would be really, really stupid to mess that up. The markets believe they won’t be that stupid, and the rest of us should hope they are right.

Countries should adapt – but always focus on what they are good at