Pol­i­tics al­ways comes back to the econ­omy

The Sunday Telegraph - Money & Business - - Business - LIAM HALLIGAN Fol­low Liam on Twit­ter: @liamhal­li­gan

Ev­ery year, I get heav­ily in­volved in the party con­fer­ence sea­son, speak­ing at fringe meet­ings, gos­sip­ing with MPS and min­is­ters, and gen­er­ally in­dulging my ap­petite for po­lit­i­cal in­trigue.

Then, hav­ing made my an­nual visit to the “West­min­ster bub­ble” – al­beit away from West­min­ster – I feel an over­whelm­ing urge to re­state what I see as a univer­sal truth.

For it re­ally is “the econ­omy, stupid” – to bor­row the cel­e­brated cam­paign slo­gan that helped Bill Clin­ton se­cure the White House in the early Nineties. Eco­nomic growth, and the con­tin­u­a­tion, or oth­er­wise, of fi­nan­cial sta­bil­ity in the UK and else­where will ul­ti­mately de­ter­mine if the Tories win the next elec­tion. It’s the econ­omy that mat­ters when it comes to Jeremy Cor­byn’s fu­ture and the out­come of the Brexit talks.

Pol­i­tics is about the poli­cies and per­son­al­i­ties of the peo­ple in­volved – be they Cabi­net min­is­ters, party ac­tivists or or­di­nary vot­ers. But if you re­ally want to read the po­lit­i­cal runes, you need to fol­low eco­nom­ics.

So, yes, I watched the Prime Min­is­ter’s dis­as­trous con­fer­ence speech in Manch­ester. It was un­for­tu­nate Theresa May was hob­bled by a cough­ing fit and stupid prankster, and she did well to carry on. Yet the speech it­self, meant to re­launch her pre­mier­ship, was fee­ble – coun­ter­pro­duc­tive on hous­ing and with lit­tle else of any pol­icy sig­nif­i­cance. What re­ally struck me, though, is that af­ter May spoke, the pound hit a four-week low against the dol­lar, amid doubts about her dura­bil­ity and spec­u­la­tion the Bank of Eng­land may yet de­lay its first in­ter­est rate rise since July 2007.

Hav­ing had its strong­est month in Septem­ber for over two years, ster­ling dipped – partly on May’s per­ceived weak­ness. But there’s also a grow­ing sense the Bank won’t quite muster the courage to raise rates be­fore Christ­mas, even though the Fed­eral Re­serve has hiked them three times since Jan­uary 2015.

Af­ter over­dos­ing on pol­i­tics, I wanted to high­light a few global eco­nomic re­al­i­ties. These are part of no one’s main­stream po­lit­i­cal anal­y­sis but they could, over the com­ing months, mas­sively im­pact West­min­ster, the Ar­ti­cle 50 ne­go­ti­a­tions and the other peren­ni­als of head­line po­lit­i­cal news.

The first re­lates to the with­drawal of global quan­ti­ta­tive eas­ing and in­ter­est rate nor­mal­i­sa­tion. Once these pro­cesses be­gin in earnest, bloated fi­nan­cial mar­kets may take se­ri­ous um­brage – up­end­ing pol­i­tics ev­ery­where. We are, of course, in un­charted mon­e­tary wa­ters. Dur­ing the 10 years since the fi­nan­cial cri­sis, cen­tral banks in the UK and US have ex­panded their bal­ance sheets to an un­prece­dented de­gree. The Euro­pean Cen­tral Bank is still at it, pur­su­ing so-called “ex­tra­or­di­nary mea­sures”, as are its coun­ter­parts in China and Ja­pan. The big­gest pol­icy ques­tion on the planet is what hap­pens, and will fi­nan­cial mar­kets col­lapse, when this turbo-charged money print­ing stops.

As QE is with­drawn, can in­ter­est rates then be raised to­wards more nor­mal lev­els across the globe – so they are at least greater than in­fla­tion, turn­ing “real” rates pos­i­tive? That would sta­bilise banks and re­store in­vest­ment re­turns on a vast ar­ray of bonds and other fi­nan­cial in­stru­ments, fi­nally lay­ing the 2008 dis­as­ter to rest.

Such is­sues sound tech­ni­cal and inane. But they are ab­so­lutely vi­tal in de­ter­min­ing whether the UK econ­omy keeps grow­ing, or if global mar­kets in­stead suf­fer an­other sys­temic “Lehman mo­ment”.

Were that to hap­pen, mil­lions of British vot­ers could lose pa­tience with cap­i­tal­ism and the po­lit­i­cal and fi­nan­cial classes that run it. Ex­treme pol­i­tics would be very much in vogue. There could be an­other snap gen­eral elec­tion, af­ter a Com­mons vote of no con­fi­dence in the Tories sparked by eco­nomic chaos. Cor­byn, on his way to Down­ing Street, would be forced to have tea with the Queen.

Many now ar­gue there will be a “beau­ti­ful nor­mal­i­sa­tion” – and there may be. The Fed rate rises we’ve seen over the last two years have so far gone quite smoothly, with mar­kets re­main­ing calm. Other ma­jor na­tions need to join in, though, and QE must fi­nally end. And un­til all that hap­pens, dan­gers linked to the un­wind­ing of ex­treme mon­e­tary mea­sures will re­main a ma­jor shadow over global mar­kets, threat­en­ing to turn pol­i­tics on its head.

Other global eco­nomic co­nun­drums loom over Bri­tain’s party po­lit­i­cal shenani­gans. Will the US en­dure an­other debt ceil­ing cri­sis this au­tumn? Will Con­gres­sional rows over more bor­row­ing, post­poned for now by the need to re­spond to hur­ri­canes in Florida and Texas, spread fears of sov­er­eign de­fault? Will China, the world’s se­cond-big­gest econ­omy, keep boom­ing? There is, af­ter all, no sign of gen­uine re­form. As pres­i­dent Xi Jin­ping nears the end of his first five-year term, his promised struc­tural changes haven’t hap­pened. The state-owned en­ter­prises and the fi­nan­cial sys­tem that feeds them re­main bloated and opaque.

Will grow­ing ten­sion be­tween the US and China re­sult in a pro­tec­tion­ist pile-up and broader global trade war? China’s vast trade sur­plus with the US means Don­ald Trump may choose to pro­voke, cal­cu­lat­ing that Beijing has an in­cen­tive to give ground. But Wash­ing­ton is vul­ner­a­ble to a Chi­nese re­tort against US cor­po­rates and the risk Beijing starts de­valu­ing the yuan again or – far worse – threat­ens to un­load its vast hold­ings of US gov­ern­ment debt.

Then there is the eu­ro­zone. Can the sin­gle cur­rency hold to­gether, as the money print­ing stops? Or will a great euro un­rav­el­ling cause global fi­nan­cial car­nage? That, in my view, is the ma­jor sys­temic danger in the world to­day.

So, yes, party con­fer­ences are in­ter­est­ing – and fun. But when it comes to pre­dict­ing pol­i­tics, the dis­mal science is where it’s at.

‘When it comes to pre­dict­ing pol­i­tics, the dis­mal science is where it’s at’

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