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| 'Prepare for the worst, hope for the best': economists on the Brexit watch data | |
| (about 1 hour later) | |
| David Blanchflower, professor of economics at Dartmouth College, New Hampshire, and member of the Bank’s monetary policy committee (MPC) from June 2006 to May 2009: | David Blanchflower, professor of economics at Dartmouth College, New Hampshire, and member of the Bank’s monetary policy committee (MPC) from June 2006 to May 2009: |
| Markets don’t like uncertainty or surprises. The Brexit vote was a shock that immediately caused a big drop in the pound which today is trading below $1.30 and likely headed lower. Both Fitch and S&P have downgraded the UK’s credit rating. The value of the UK’s holdings of shares in Royal Bank of Scotland and Lloyds are down by around a quarter since the vote. The Bank of England’s Agents’ survey of companies gathered since the referendum indicated the result of the vote would have a negative effect overall on capital spending, hiring and turnover over the coming year. Business and consumer confidence collapsed in July but picked up in August after the Bank of England sensibly cut interest rates and started a new round of quantitative easing. They seem to have learned from their failures to act early in 2008. | Markets don’t like uncertainty or surprises. The Brexit vote was a shock that immediately caused a big drop in the pound which today is trading below $1.30 and likely headed lower. Both Fitch and S&P have downgraded the UK’s credit rating. The value of the UK’s holdings of shares in Royal Bank of Scotland and Lloyds are down by around a quarter since the vote. The Bank of England’s Agents’ survey of companies gathered since the referendum indicated the result of the vote would have a negative effect overall on capital spending, hiring and turnover over the coming year. Business and consumer confidence collapsed in July but picked up in August after the Bank of England sensibly cut interest rates and started a new round of quantitative easing. They seem to have learned from their failures to act early in 2008. |
| The collapse in business and consumer confidence data from April 2008 was the earliest signal that the Great Recession had started. So it was sensible for the MPC to act when they collapsed after the Brexit vote and not to wait, as some have suggested, for the “hard data”. The chart below illustrates that doing that in 2008 meant missing the start of a once in a hundred years recession by over a year. It plots the revisions for GDP growth in the second quarter (Q2) of 2008. In June 2008 the Office for National Statistics published its first estimate of GDP growth for Q2 2008 at +0.2%. In August 2008 it cut the estimate to zero but then cut it to -0.1% in June 2009. The latest estimate today is -0.6%. | The collapse in business and consumer confidence data from April 2008 was the earliest signal that the Great Recession had started. So it was sensible for the MPC to act when they collapsed after the Brexit vote and not to wait, as some have suggested, for the “hard data”. The chart below illustrates that doing that in 2008 meant missing the start of a once in a hundred years recession by over a year. It plots the revisions for GDP growth in the second quarter (Q2) of 2008. In June 2008 the Office for National Statistics published its first estimate of GDP growth for Q2 2008 at +0.2%. In August 2008 it cut the estimate to zero but then cut it to -0.1% in June 2009. The latest estimate today is -0.6%. |
| My worry is that there is a lot of bad news to come. It is good to get your retaliation in first. Prepare for the worst and hope for the best. Watch this space. | My worry is that there is a lot of bad news to come. It is good to get your retaliation in first. Prepare for the worst and hope for the best. Watch this space. |
| Andrew Sentance, senior economic adviser at the consultancy PwC and member of the Bank’s monetary policy committee from October 2006 to May 2011: | Andrew Sentance, senior economic adviser at the consultancy PwC and member of the Bank’s monetary policy committee from October 2006 to May 2011: |
| I believe the Bank should have held fire until it had more evidence on how the economy would respond to the post-Brexit shock. There is a genuine danger of unintended adverse consequences from their current policy. Bond yields have fallen further and pension fund deficits have widened by £100bn, according to PwC estimates. | I believe the Bank should have held fire until it had more evidence on how the economy would respond to the post-Brexit shock. There is a genuine danger of unintended adverse consequences from their current policy. Bond yields have fallen further and pension fund deficits have widened by £100bn, according to PwC estimates. |
| Monetary policy has become too preoccupied with short-term issues since the financial crisis and is not focused on the longer-term goal of ensuring a balanced recovery and ensuring that savers can expect reasonable returns to provide income in retirement. The difficult process of gradually raising interest rates is always put off to another day in the future. | Monetary policy has become too preoccupied with short-term issues since the financial crisis and is not focused on the longer-term goal of ensuring a balanced recovery and ensuring that savers can expect reasonable returns to provide income in retirement. The difficult process of gradually raising interest rates is always put off to another day in the future. |
| The early indicators about the growth of the UK economy since the Brexit vote have been mixed. The economy seems to have rebounded after the shock to confidence in July, helped by the stabilisation in the political situation. Retail sales and other measures of consumer spending have held up reasonably well. But estimates for the overall growth of the economy in the third quarter point to an increase of just 0.2-0.3% over the previous quarter – equivalent to an annual growth rate of about 1%. That would represent a significant slowdown from the 2.2% growth we saw in the year before the Brexit vote. | The early indicators about the growth of the UK economy since the Brexit vote have been mixed. The economy seems to have rebounded after the shock to confidence in July, helped by the stabilisation in the political situation. Retail sales and other measures of consumer spending have held up reasonably well. But estimates for the overall growth of the economy in the third quarter point to an increase of just 0.2-0.3% over the previous quarter – equivalent to an annual growth rate of about 1%. That would represent a significant slowdown from the 2.2% growth we saw in the year before the Brexit vote. |
| We don’t yet have much hard evidence on the performance of investment, which is the area of the economy which was expected to be hit hardest by Brexit uncertainty. But business surveys are showing much softer investment intentions across all sectors of the economy. So it is still reasonable to expect the investment-driven slowdown in growth next year which most forecasters are expecting. | We don’t yet have much hard evidence on the performance of investment, which is the area of the economy which was expected to be hit hardest by Brexit uncertainty. But business surveys are showing much softer investment intentions across all sectors of the economy. So it is still reasonable to expect the investment-driven slowdown in growth next year which most forecasters are expecting. |
| Another factor which is expected to hold back growth next year is the squeeze on spending power from rising inflation. Headline measures of inflation are not yet reflecting the very substantial fall in the pound over the past 12 months. But that is only a matter of time. | Another factor which is expected to hold back growth next year is the squeeze on spending power from rising inflation. Headline measures of inflation are not yet reflecting the very substantial fall in the pound over the past 12 months. But that is only a matter of time. |
| Sterling shows little sign of any rebound from its post-referendum level of around $1.30 and €1.15. The UK’s trade-weighted exchange has fallen by over 15% in the past year and its average level in August was the fourth lowest for any month since 1980. I am sceptical that this will do much to boost exports, however. The UK’s main exports are high value-added manufactures and services, neither of which are price-sensitive. | Sterling shows little sign of any rebound from its post-referendum level of around $1.30 and €1.15. The UK’s trade-weighted exchange has fallen by over 15% in the past year and its average level in August was the fourth lowest for any month since 1980. I am sceptical that this will do much to boost exports, however. The UK’s main exports are high value-added manufactures and services, neither of which are price-sensitive. |
| The MPC’s decision to cut interest rates and inject more quantitative easing has added to the weakness of sterling and it is far from clear it will help the economy in the transition to Brexit. The resilience shown by the latest housing market indicators suggest there is a real risk that we will see a further surge in house prices on the back of extremely low interest rates, adding to the imbalances which have been apparent in the UK economy for many years. | The MPC’s decision to cut interest rates and inject more quantitative easing has added to the weakness of sterling and it is far from clear it will help the economy in the transition to Brexit. The resilience shown by the latest housing market indicators suggest there is a real risk that we will see a further surge in house prices on the back of extremely low interest rates, adding to the imbalances which have been apparent in the UK economy for many years. |