Sterling can take Brexit pain
GOLDMAN Sachs’ forecast that Brexit could send the pound plummeting by 15pc to 20pc should be taken with a pinch of salt. Earlier in the year the same investment bank predicted an oil price of $20-a-barrel or weaker but despite the warning crude has hovered around the $30 level. It used to be the case that a Goldman, or for that matter any investment bank projection, could become self-fulfilling because they were allowed to trade on their own account.
The post-crisis Volcker rule which seeks to make investment banking less risky and less burdened with conflicts of interest has taken care of that.
The bigger question is: Would it be so bad if the pound did stumble? There is history to suggest it can be a good thing. Past devaluations dating back to 1967 have been followed by strong export-led recoveries.
The most remarkable one was after the UK left the Exchange Rate Mechanism in 1992 and the pound fell by 15pc against the currencies of our trading partners. It sparked an economic boom that arguably lasted until the onset of the financial crisis in 2007. But it has to be remembered that free- dom from the ERM came after a long period of keeping sterling artificially high by shadowing the German mark and keeping interest rates sky high.
Once the bonds had been broken, a more competitive pound and lower interest rates triggered the recovery.
The impact of devaluations isn’t always so swift. In the aftermath of the 2007-09 financial crisis, sterling fell by close to 25pc and thengovernor Mervyn King predicted an export-led recovery which never fully materialised. This partly was because our biggest trading partner, the European Union, was stuck in a euro, banking and deficit quagmire.
This time there is caution in monetary circles about the impact of a disorderly fall in the pound. That is because the balance of payments with the rest of the world is more heavily in deficit than in the past, at 4pc or so of national income.
We shouldn’t overdo the fears. The Bank of England says, so far, there is no evidence business investment is being affected by Brexit.
Moreover, given Britain’s negligible inflation rate and the collapse of oil and other commodity prices there is no reason to dread higher costs for imports. And a weaker pound should make exports more competitive.
The reality is that disruption for sterling is far less damaging now than a combination of the oil shock, China’s slowdown, recession in key emerging markets and capital flows triggered by the US interest rate hike in December. Yes the Bank has lowered its output forecast to 2.2pc this year and to 2.3pc in 2017 from 2.5pc and 2.6pc in the November Inflation Report.
However, with interest rates now less likely to rise this year it doesn’t look as if the Old Lady is girding herself for a panic attack on the pound just yet.
Brown plan
FORMER PM Gordon Brown is always worth listening to when it comes to big-picture economic fixes which is why bond experts Pimco wanted him as an adviser.
His latest wheeze is a ‘Marshall plan’ for the 12m displaced Syrians concentrated in Lebanon, Jordan and Turkey. His weapon of choice for collecting and distributing the cash is a Middle East Development Bank as proposed by Qatar.
The idea is fraught with potential problems: would Iran and the Gulf countries feel happy about sitting down at the same table? What about membership for Syria and Yemen both torn apart by civil war? Could there be a role for Israel?
There would also be the worry that, like other development banks, it would become something of a boondoggle with great amounts of cash spent to make superannuated directors comfortable and less on economic renaissance. A simple approach would be to change the mandate of the World Bank so it can provide direct assistance to middle-income countries such as Turkey and Jordan.
After the ‘Arab spring’, the glistening bank, the European Bank of Reconstruction & Development, was given an expanded role in the Middle East. So there are already institutional arrangements in place. Justine Greening’s Syria summit, designed to raise funds for educating refugee children from Syria and creating jobs on the ground, is critical.
What is needed is a tested development bank to make sure the money gets where it is meant to be with a minimum of waste and corruption. Enhancing the mandate of the World Bank and EBRD would allow a sensible, speedy response.
Vanishing jobs
FORMER Prudential boss Tidjane Thiam couldn’t by all accounts wait to flee the fast-growing British insurer last year and apply his talents to investment banking at Credit Suisse.
Turning around the tanker is proving tricky: in spite of raising new capital in October the bank is struggling to meet capital standards after reporting heavy losses for the final quarter of the year.
Thiam is taking a robust approach by ‘right-sizing’ the London office, which means getting rid of 2,000 people. This comes hard on the heels of ‘voluntary separation’ at Ford and ‘demising’ people at HSBC.
Whatever happened to oldfashioned sackings or redundancies?