Issue of the week: Boris and business
Britain’s likely new PM will take office at a perilous moment. Will Johnson be equal to the task?
The risk that Britain could exit the EU in a disorderly fashion, with no agreement or transition period, has been with us for a while, said Swaha Pattanaik on Reuters Breakingviews. But “investors have so far assigned a fairly low probability to it”. This week, however, the mood darkened. The competition between Boris Johnson and Jeremy Hunt to take ever harder stances on Brexit-at-all-costs by the end of October sent sterling falling to 27month lows against the dollar (around $1.24) in expectation of economic havoc, and of lower interest rates to ease the pain. Options prices show that investors are “bracing for further declines” in the pound. Richard Branson predicts that sterling will hit parity with the dollar (and below parity with the euro) in the event of no deal, said David Smith in The Sunday Times. That’s a touch below market expectations, but it is “in the ballpark”. Will Britain’s new PM face an imminent sterling crisis? The chances are alarmingly high.
But currency weakness isn’t the big problem, said Roger Bootle in The Daily Telegraph. The more fundamental issue facing Britain is its large trade deficit and even larger current account deficit (meaning we depend on foreigners’ money to keep us going). At about 4% of GDP last year, and probably 5% this year, it’s the biggest in the developed world. “If the UK were an emerging market, the hedge fund vultures would already be circling.” True, if both Brexit and the prevailing political uncertainty are resolved, we can expect firms to recover their confidence about making real investments in the UK and international investors to pile into sterling assets. But that just leaves us with another problem: it would send the pound much higher. And the last thing our export and import competing firms need now is a much stronger pound.
If only Johnson had the economic chops to deal with all this, said Rachel Sylvester in The Times. Alas, his most memorable economic policy was his “f*** business” jibe, and his economic ideas are muddled and contradictory. He insists that the “poorest come first” yet plans tax cuts for the rich. He’s planning an emergency budget to ensure the economy is going “gangbusters” by 31 October, yet the idea that measures announced in September could have any impact by then is a joke. What is certain, said Philip Aldrick in The Times, is that the near-decade of extreme fiscal prudence is over, to be replaced under Johnson by an era of greater borrowing, freer spending and widening deficits. The idea is that a “debt-funded moonshot” would pay for itself in higher growth and tax receipts. It’s a leaf from the “Donald Trump playbook” – and it’s quite a “leap of faith”.