What are the economic implications of Brexit?

Today there can only be one subject although as ever I will avoid the politics as much as is possible. Anyway at the current rate of progress anything on that subject would be out of date before I finished typing! At least in a world where the Brexit Secretary resigns over the Brexit deal. What exactly has he been doing these last few months? Let us move onto what is the debate over the economics and look at the outlook published by the International Monetary Fund or IMF yesterday.


The background is something that we are hearing from many establishments and central banks these days.

Moderate growth of just above 1½ percent is projected for the coming years, conditional on reaching a broad free trade agreement (FTA) with the EU and a smooth Brexit process.

Obviously the second part of the sentence is specific to the UK but both the Bank of England with its “speed limit” and the European Central Bank or ECB have been hammering out this bear. As ever the problem is how we got here? After all both central banks have indulged in monetary easing on a grand scale involving large interest-rate cuts, QE and credit easing. Yet the future is apparently not as bright as they promised. In essence we in Europe have a future that is a bit better than the past trajectory of Italy as we note that such views only cover what Chic called “Good Times” and mostly ignores recessions and setbacks.

The view from Tokyo is even worse where expanding the balance sheet of the Bank of Japan to more than 100% of GDP has led to the speed limit being between 0.5% and 1%. Is that the next step? Because if so a lot harder questions need to be asked about the way that central banks have been allowed to operate as borrowing from Peter to pay Paul has not gone anything like as well as they have claimed.

IMF View

Here is their base view on a no-deal Brexit.

On the downside, reverting to WTO trade rules, even in an orderly manner, would lead to long-run output losses for the UK of around 5 to 8 percent of GDP compared to a no-Brexit scenario. This is because of higher tariff and non-tariff trade barriers, lower migration, and reduced foreign direct investment.

The issue with that style of analysis is that in the long-run many things will change and we simply do not know what they will be. For example the UK would likely end up with higher trade tariffs with the European Union but might cut them elsewhere. Initially one would expect foreign investment to be lower due to the uncertainty but as time passes the UK may make moves – for example a mooted reduction in Corporation Tax – to offset that. Lower migration is the most likely to continue although as we have until now had little control over our borders it seems set to be driven by demand with fewer people wanting to come.

The IMF has a worse scenario for a disorderly situation.

A worst-case scenario would be a disorderly exit from the EU without an implementation period. In such a scenario, a sudden shift in investors’ preference for UK assets could lead to a sharp fall in asset prices and a hit to consumer and business confidence, which in turn would have adverse
impact on the balance sheets of households, firms and financial intermediaries. Sterling would depreciate further, raising domestic prices and affecting households’ real income and consumption. A disorderly exit is likely to lead to widespread disruptions in production and

If we pick our way through this we open with what is mostly a euphemism for house prices which are of course supposed to be already falling. In fact I though and indeed hoped we would see a fall as they are too high but if we take yesterday’s official data we see that they were rising at an annual rate of 3.5% in September. One asset price that is surging today is the UK Gilt market where the long gilt future has risen over one point and the ten-year yield has fallen from 1.5% to 1.38%. As we have political turmoil right now and a disorderly departure is thus more likely this is awkward for the IMF. Of course the driving force in my opinion is investors seeing through the rather transparent “Forward Guidance” of Bank of England Governor Mark Carney and expectations of him pressing on his control P button. Last time around his “Sledgehammer QE” drove the ten-year Gilt yield as low as 0.5% so you can see what punters, excuse me investors may be thinking of.

If we move onto business investment then the IMF finds much firmer ground under its feet basically because of this. From last Friday’s GDP release by the Office for National Statistics.

being partially offset by a fall of 1.2% in early estimates of business investment.

The issue around consumer confidence is more complicated as some issues remain here as the IMF hints at.

At 8.1 percent yoy in August, consumer credit growth remains high relative to income growth.

What would happen to sterling? Well this morning;s circa two cent fall versus the US Dollar gives backing to the IMF view but of course we are already considerably lower than we were. So I do not expect a similar move unless there is a complete calamity. That brings in the trade issue where a calamity would mean trade at the ports and airports grinding to a halt. In the political shambles we are living through that is of course possible but you would think both sides would move heaven and earth to avoid it.


As you can see there is some solid backing for the IMF view but also more than a few areas which are debatable. To be fair it does hint at one of these itself.

New trade arrangements with countries outside the EU could offset some of losses on trade with the EU over the long run.

The exact balance is simply unknowable. For example in the short-term one would expect trade in goods and services to be affected but over time new products and methods will apply. Philosophically this type of steady-state analysis will always look bad because any change on this scale will have dislocations but any possible benefits are for the future and are therefore unpredictable. Indeed there is always a lot of doubt about such matters. Let me illustrate this with something from the IMF as recently as July 4th on the subject of Germany.

In the first quarter of 2018, growth slowed to 0.3 percent (qoq), reflecting a normal correction following unusually strong growth in late 2017 and temporary factors (strikes, a particularly nasty flu outbreak, and early Easter holidays).

Is the flu outbreak ongoing as we mull this from the German statistics office yesterday?

The Federal Statistical Office (Destatis) reports that, in the third quarter of 2018, the gross domestic product (GDP) shrank by 0.2% on the second quarter of 2018 after adjustment for price, seasonal and calendar variations. This was the first decline recorded in a quarter-on-quarter comparison since the first quarter of 2015.

That reduced the annual rate of GDP growth to 1.1% or half of what the IMF forecast for this year (2.2%) and pretty much half of what was forecast for next year (2.1%).

Next let me move to the UK consumer which I have dodged so far and maybe the most unpredictable of all. The reason for this is it is entwined with Bank of England policy and the IMF did its best to rewrite history tucked away in its report.

Mortgage rates are at record low levels in part due to intense bank competition.

After all the Bank of England moves to reduce mortgage rates ( remember its own research suggested a nearly 2% fall in them due to the Funding for Lending Scheme on its own) that is breathtaking! Any “intense bank competition” has been driven by the policy of “the spice must flow” to the banks.

Which brings me to my next suggestion which is the surge in the UK Gilt market is in my opinion due to it rejecting the Forward Guidance of “limited but gradual interest-rate rises” of Mark Carney and the Bank of England. Instead expectations of Sledgehammer QE 2.0 which if you recall in its madness drove the ten-year Gilt yield to 0.5% seem to be at play. Perhaps a Bank Rate cut to what after all is the “emergency” rate of 0.5% too.

So how do you think the UK consumer would respond now?

Number Crunching 

Is everything 1.5% these days? From the IMF about UK Bank Rate.

The nominal policy rate is still below the Fund staff’s estimated neutral rate of about 1½ percent




Will UK house prices fall by 35% and is that a good thing?

Yesterday the Governor of the Bank of England attended the UK Cabinet meeting to update them on what the Bank thinks about the potential post Brexit economic situation. Typically the main area focused on has been house prices which of course is revealing in itself. Let us take a look at how this has been reflected in the Bank’s house journal otherwise known as the Financial Times.

Mark Carney, Bank of England governor, has delivered a “chilling” warning to Theresa May’s cabinet that a no-deal Brexit could lead to economic chaos, including a property crash that could see house prices fall by a third.

I pointed out on social media that whilst the journalists at the FT might find such a fall in house prices “chilling” first-time buyers would welcome it. Maybe they might start to find a few places to be affordable. So they might well welcome the fact that the FT then remembered that 35% is more than a third!

Among Mr Carney’s most stunning warnings was that house prices would be 35 per cent lower than would otherwise be the case three years after a disruptive no-deal Brexit — which would assume a breakdown in trading relations with the EU.

If you are wondering what would cause this then it was Governor Carney’s version of the four horsemen of the apocalypse.

The property crash would be driven by rising unemployment, depressed economic growth, higher inflation and higher interest rates, Mr Carney warned.

This is where the water gets very choppy for Governor Carney. This is because he has played that card before, and two of his horsemen went missing. Let me explain by jumping back to May 2016. From the Guardian.

The Bank warned a vote to leave the EU could:

  • Push the pound lower, “perhaps sharply”.
  • Prompt households and businesses to delay spending.
  • Increase unemployment.
  • Hit economic growth.
  • Stoke inflation.

Missing from that list is the higher mortgage rates that he had suggested earlier in 2016. Three of the points came true to some extent as the Pound £ fell and due to it inflation by my calculations rose by 1.25% to 1.5%. This reduced real wages and hit UK economic growth. But unemployment continued to fall and employment rise. Also the delays in spending did not turn up. Or to be more specific whilst there may have been some investment delays, the UK consumer definitely did go on quite a splurge as retail sales boomed.

Where the Governor also hit trouble was on the recession issue. This was partly due to his habit of playing politics where he associated himself with forecasts suggesting there would be one. The actual Bank of England view was careful to use the word “could” but the HM Treasury one was not.

a vote to leave would represent an immediate and profound shock to our economy. That shock would push our economy into a recession and lead to an increase in unemployment of around 500,000, GDP would be 3.6% smaller, average real wages would be lower, inflation higher, sterling weaker, house prices would be hit and public borrowing would rise
compared with a vote to remain.

Partly due to his own obvious personal views Governor Carney got sucked into this. It did not help that the HM Treasury report was signed off by the former Deputy Governor Sir Charlie Bean which gave it a sort of Bank of England gloss and sheen. The May 2016 Inflation Report press conference had question after question on the recession issue which illustrates the perception at the time. Then this was added to in July and August 2016 when the Bank of England and in particular its Chief Economist Andy Haldane again raised the recession issue by telling us the Bank needed a “Sledgehammer” response and then delivering it. Or half delivering it because by the time we got to the second part being due ( November 2016) it was clear that the chief economist had got it wrong. But that phase seemed to be driven by a Bank of England in panic mode looking at a later section of the HM Treasury report.

In this severe scenario, GDP would be 6% smaller, there would be a deeper recession, and the number of people
made unemployed would rise by around 800,000 compared with a vote to remain. The hit to wages, inflation, house prices and borrowing would be larger. There is a credible risk that this more acute scenario could materialise.

Did the Bank of England Sledgehammer stop a recession?

Over the past 2 years this has come up a lot with journalists and ex Bank of England staff suggesting that it did. If so it would have been the fastest real economy response to monetary action in history. That would be odd at a time the ECB was telling us it thought the reaction function had slowed, But anyway rather than me making the case let me hand you over to Mark Carney himself and ony the emphasis is mine.

Monetary policy operates with a lag – long and
variable lag, as you know – and if there is a sharp adjustment in demand, in activity, from whatever event, it will take some time for stimulus, if it’s provided – if it’s appropriate to be provided – for it to course through the economy and offset, to cushion that fall in demand. ( May 2016 Inflation Report press conference)

Although he did later claim to have “saved” 250,000 jobs showing yet again the appropriateness of the word unreliable in his case.


This is another awkward area for the Governor as he is back to predicting higher interest-rates. The last time he did that he cut them! Still maybe he has learnt something as his critique of a future cut is a description of what happened after the August 2016  one.

“If you cut rates you would end up with higher inflation.”

Public Finances

Moving away from the Governor to the Chancellor he appears to be unaware that the deficit figures have improved considerably.

Mr Hammond said the Treasury would be constrained in its ability to tackle the crisis by boosting spending, noting the country was still recovering from the aftermath of the 2008 crash and questioning the effectiveness of a fiscal stimulus in one country.


There is a fair bit to consider here. Let us start with house prices which have proved to be rather resilient in 2017/18, and I mean the dictionary definition of resilient not the way central bankers apply it to banks and growth. I thought we would see the beginnings of some falls but whilst there have been some in London the national picture has instead been one of slowing growth. The ideal scenario in my opinion would be for some gentle falls to deflate the bubble.Some argue that it could be done by them being flat for a while but with wage growth seemingly stuck in the 2% to 3% range that would take too long in my opinion.

But house prices are too high and the Bank of England and the government have conspired and operated to put them there. The use of the word “help” in some of the policies has been especially Orwellian as the result of it is invariably to push house prices even higher and thus even more out of reach. So to them a 35% fall seems dreadful and I can imagine the gloom around the cabinet table as it was announced. The Governor would have been gloomy too as the fall would be slightly larger than the rises his policies have helped to engineer as we mull whether that is why 35% in particular was chosen?

So overall a 35% fall in house prices would bring benefits but it would not be a perfect policy. I have had various replies on social media from people who have recently bought and I have friends in that position. I wish them no ill which is why my preference is for the scenario I have outlined. But the housing market cannot be a one way bet forever .

Also let us take some perspective. You see there is little new in the forecast we have discussed today as it has been the Bank of England no-deal Brexit forecast for some time now. So let me finish on a more optimistic note tucked away in the FT article.

However, he boosted Mrs May’s position when he said that if she struck a Brexit deal based on her much-criticised Chequers exit plan presented to Brussels in July, the economy would outperform current forecasts because it would be better than the bank’s assumed outcome.

A reward for his extra seven months? At that point the Prime Minister might have mused how much nicer he might have been if she had given him an extra year.


The Brexit Breakfast saga

Yesterday saw quite an extraordinary missive from the offices of KPMG that combined economics and an insight into the apparent habits of staff at that organisation. It led to some debate and indeed some humour so let us take a look. From the Guardian.

Brexit breaks breakfast? Hard Brexit could mean hard luck for fry-up fans…….Shoppers would be forced to pay £3 more for a traditional British fry-up if the government fails to secure a trade deal with the EU, piling more pressure on already cash-strapped consumers.

That is a bit of a shock is it not as it implies such a breakfast would be £3 more each which seems rather extreme. Of course some products have risen in price already due to the lower value for the UK Pound £ as the UK imports quite a bit of the food it consumes.

Here is how Bloomberg released this.

The price attracted my attention so I enquired if they only ate in five-star hotels? It quickly turned out that I wasn’t the only one.

let’s just say I enjoyed a full English last week £7.50. Same price as a year ago at my same local coastal cafe. ( @mhewson_CMC )


Read this (and its comments) with your breakfast. £5 here at Totnes Waterside (  @RSR108 )


Tesco all you can eat £4,95 KPMG making a real dogs dinner of their analysis. No doubt you can get cheaper elsewhere ( @BarrattPeter )

The analysis stated that the ingredients came from the mid-range of a UK supermarket although some were not convinced.

“KPMG UK analysed the cost of mid-range ingredients of a fry-up from a leading UK supermarket” where…Fortnum and Mason??! ( @maximbroking )

I am not sure if the Guardian re wrote their article but anyway it now states that this was for a family breakfast, something missing from the original Bloomberg article. The debate then shifted to the choice of ingredients with the choice of olive oil to the fore.

Somewhere that cooks its breakfasts in a litre of olive oil? ( @dsquaredigest)

I have to confess I was beginning to feel a little queasy especially as it turned out that some might do this albeit if course we do not know what oil was used here.

I used to have a friend who did their fryups in about two inches depth of fat…utterly inedible! ( @MattBrookes3 )

There were some alternative suggestions for the use of olive oil.

You don’t cook in it, you barbarian. You wash down your meal with a couple of pints of it. ( @Birdyworld)

One Bloomberg journalist did appear willing to give it a go.

As I mulled the list I was curious about the addition of French butter to the list for two reasons as what I buy is mostly UK butter and of course French butter is usually unsalted giving a very different taste. I wasn’t the only one it would seem.

Welsh butter with mine please boyo ( @putt1ck )


I’m remain/internationalist but I always buy UK for my fry up, I don’t think these calcs will effect me? PS toss the oil, use butter! ( @LukeMcElligott )

Some took this a stage further.

I find Swiss organic grass-fed butter goes better with baked beans………but only ever fair-trade Himalayan Yak butter with my Japanese Kotoka Strawberry jam. Obviously, ( @WEAYL )

The issue of strawberry jam got a mention.

and who puts strawberry jam on their fry-up!? ( @ChrisB_IG )

Although hope springs eternal for one Bloomberg customer.

Bacon=NL,bread=local,Cherry vine tomato=Spain/NL/or Kent UK 😉 Strawberry jam= free with Bloomburg subscription (I would hope) ( @Svedenmacher )

We did discover someone keen on French butter albeit for a modern reason.

I often buy President butter, especially lately … to piss off the Brexiteers ;). ( @ClausVistensen )

Thus we found quite a bit of debate over the ingredients which then seemed to be reflected off Bloomberg Towers.

Also there’s no ketchup or hash browns. The moral of this story is don’t go for breakfast at KPMG ( @Lucy_meakin )

Considering the cost some were unhappy with the quality.

Funny looking sausage anyway. I think I’ll give it a miss. ( @PaulKingsley16 )

As ever some were hoping for a bright side to the issue.

Does anyone know if KPMG have vacancies for analysts economists researchers -will come out of retirement for their hourly Breakfast rates. ( @BarrattPeter)

Whereas the other side of the atlantic felt we needed to widen our perspective somewhat.

You Europeans are so dense. It’s the labor cost component of the typical Chinese household cook that’s driving up breakfast costs. ( @EquityTrader44 ).

Still it could all have been much worse. Imagine this for breakfast or anything really.

Another salvo in the war on cash

There is much to consider in the report on the gig economy by Matthew Taylor today but one bit in particular caught my eye.

The author of a government review into work practices would like to see an end to the “cash-in-hand economy”.

Matthew Taylor, whose report is out on Tuesday, said cash jobs such as window cleaning and decorating were worth up to £6bn a year, much of it untaxed.

Although he wants to present it as progress.

Mr Taylor also said he did not want to ban cash payments outright, but hoped, over time, the increasing popularity of transaction platforms such as PayPal and Worldpay would see a shift from cash-in-hand work.

“In a few years time as we move to a more cashless economy, self-employed people would be paid cashlessly – like your window cleaner. At the same time they can pay taxes and save for their pension,” he said.

This has many of the features of so-called blue sky thinking reports. In itself the cash in hand economy is hard to defend because tax is not paid and it is therefore unfair on those who pay taxes on income. However his effort to claim it would benefit the workers is risible “they can pay taxes and save for their pension.” From a magic money tree? Also it is hard not to think that the establishment wanted this review as part of an effort to raise more tax like the Chancellor’s attempt to increase National Insurance on the self-employed of a fee months ago. If they cannot make a relatively minor change without a fast U-Turn how exactly will they tax these workers?

But we have a theme of more tax being paid which will please the establishment and another feature these days which is of things being leaked before they are announced properly. Why not wait a few hours? It is all about expectations management which moves me to my  main point which is that the establishment seems ever more desperate to get rid of cash.

You would think that it is one of the barriers to them introducing negative interest-rates in the future……Oh hang on!


Economic life is often much more complicated than it first appears as for example we are on the road to more electronic payments. Over the past few years I have found myself paying for things with a card that would have been unthinkable before. Yet this is also true . From the Bank of England.

Despite speculation to the contrary, the number of banknotes in circulation is increasing. During 2016, growth in the value of Bank of England notes was 10%, double its average growth rate over the past decade.

Evidence of stockpiling?

As to the breakfast saga there are a few bits to consider. The first is the British obsession with a fry-up which goes in hot pursuit of our obsession with tea. Although apparently not the latter at KPMG who drink coffee. Next we have the click bait effort of claiming breakfast would cost £26.61 where even the family addition from the Guardian does not work unless you use all of the olive oil ( I am getting queasy again) and drink several gallons of coffee with slabs of butter.

Meanwhile there are issues one of which is a regular theme of mine which is that we import so much food in the UK and could do much better on that front. Some things we cannot grow (oranges) but some we can. Actually KPMG seems unaware of what we do produce as apparently we grow a lot of mushrooms. Of course we could end up paying higher tariffs for some products as we seem to have become rather dependent on Danish bacon. But for other products such as olive oil ( assuming you use it) Europe is not the only source and transport costs are often low.

Could the Bank of England step in with some Sledgehammer Breakfast QE?


Another failure for the Forward Guidance of the Bank of England

Today completes the business surveys which will give us our best indication so far about economic life so far in the UK post the leave the European Union vote. Of course Brexit has not actually happened but some things have changed in response to its likelihood and the Bank of England’s policy changes. Financial markets can move virtually immediately in reply to changes in events in the way that the real economy can although they are far from always right as those who pushed the UK Pound £ above US $1.50 on the night of the referendum will know. It then dropped 7 cents as the Sunderland result came in and later fell further.

The UK Pound £

The UK Pound was hit hard by the leave vote and quickly fell into the low US $1.30s and indeed for a brief spell into the high US $1.20s. A similar move was seen against the Euro where the low 1.30s were replaced with a fall to 1.16. More recently the UK Pound has recovered a little of the lost ground to above US $1.33 and Euro 1.19 as a bear squeeze grips the number of short sellers looking for a one-way bet which is apparently a record.

Regular readers will be aware that I saw March 2013 as a change in UK monetary policy as from then the UK Pound strengthened. Well at the nadir in mid-August we fell back to below the 77.9 recorded then on the trade-weighted or effective exchange-rate as we saw 77.14. But the recent bounce has seen us back up to 79.8.

This means that if we use the old Bank of England rule of thumb the economic effect of the currency fall is equivalent to a 2% reduction in Bank Rate. This bazooka completely dwarfs the 0.25% peashooter that Bank of England Chief Economist Andy Haldane called a sledgehammer and is a reason why I think it was a bad move. This will have a stimulus effect on UK GDP which is good but also a stimulus effect on UK inflation which is bad. Back on the 19th of July I gave an estimate of the likely inflationary impact.

Applying the Draghi Rule would see an increase in inflation of 0.3% to 0.4%. If we look at the way that the UK economy is relatively more open than the Euro area and the fact that our fall was more against the US Dollar in which many commodities are priced I expect a larger impact on the annual rate of inflation than the Draghi Rule implies and estimate one of say 1%.

UK Gilts

The UK Gilt or government bond market took off like those North Korea rockets fired this morning after the leave vote. Let us look at the 5 year maturity because it has the most impact on fixed-rate mortgages. If we look back to the summer of 2014 when Bank of England Governor Mark Carney was using his Forward Guidance to hint at Bank Rate and hence mortgage rate rises this nudged above 2%. This had already gone very wrong before we had the leave vote as it had dropped to 0.84% leaving those who had taken his advice looking up the definition of miss-selling. Now the whole position is completely different as it has fallen to 0.24%.

Indeed the Bank of England is attempting to drive price higher and yields lower today as it looks to purchase £1.17 billion of UK Gilts in this maturity sector.

UK stock market

It is hard to believe that the UK FTSE 100 fell below 6000 on the referendum night with it now at 6883. For a while we had a whole raft of economic tourists telling us that the FTSE 250 was more important as it dipped below 15,000 in late June. However when I looked to see when it had been last mentioned on Twitter last week there was silence which I presume is associated with the fact that it is now above 18,000.

For my purposes I think that there are genuine concerns how the Bank of England “sledgehammer” of Bank Rate cuts ( one made and another promised) plus more QE have boosted asset prices again. If that was a cure for our economic ills we would not be where we are.

Business Surveys

Unlike my subject of Friday – the ongoing Greek economic depression – the UK economy has shown a V-shaped response to the early fears.

The UK service sector returned to growth in August, according to PMI® survey data from IHS Markit and CIPS……..The month-on-month gain in the index, at 5.5 points, was the largest observed over the 20-year survey history, following a record drop of 4.9 points in July.

This added to what we were told last week.

August saw solid rebounds in the trends in UK manufacturing output and incoming new orders. Companies reported solid inflows of new work from both domestic and export sources, the latter aided by the sterling exchange rate. ………….UK construction companies indicated a sustained reduction in business activity during August, but the pace of decline was only marginal and much softer than the seven-year record seen during July.

The overall picture is show below and it comes with the sound of screeching tyres as Markit does a U-Turn.

there’s plenty of anecdotal evidence to indicate that the initial shock of the June vote has begun to dissipate.

There is also some straw clutching as they try to suggest that the Bank of England policy change have had an impact which would mean that the old theory that policy moves take 18 months to impact now has switched to more like 18 hours.

Adding to the theme was this from the Society of Motor Manufacturers and Traders or SMMT.

The UK new car market achieved modest growth in August, as registrations rose 3.3% against the same month last year, according to figures released today by SMMT. 81,640 new cars were registered in the month, with year-to-date performance remaining positive, up 2.8% to 1.68 million units.

This feeds into the strong numbers for unsecured lending we have seen in 2016 which I believe includes car finance. Sadly we do not get a breakdown on this from the Bank of England although we do get a clue from the SMMT.

attractive finance deals

Also the retail sales numbers were strong and offered hope for domestic consumption.

In July 2016, the quantity bought (volume) of retail sales is estimated to have increased by 5.9% compared with July 2015; all sectors showed growth

Not everything is rosy today though

I noticed this earlier and whilst in some respects it is welcome – buyers for the UK Pound- the larger influence is on house prices which are already far too high.

The pound’s devaluation following the EU referendum has triggered a spending spree in London’s property market from foreign investors. But these overseas buyers are no longer just targeting prime central locations.

Let us see what happens as the anecdotal evidence I have received is of price falls for central London property.


Regular readers will be aware that I was sanguine about the economic impacts of a leave vote. Or to be more precise that the major impact for me would be the rise in inflation caused by the lower level of the UK Pound which would slow the economy over the medium-term via lower real wages and higher import costs. That will impact over time and there are of course issues over the actual Brexit deal which we simply do not know. So far we have seen that the UK economy has had a short-term shock and then rebounded leaving much of the media with their faces covered in egg. Some are so desperate that they are claiming that the Bank of England has driven the rebound which of course would be the fastest policy response in history. From Katie Martin of the Financial Times.

How do good PMIs “prove” the BoE over-reacted? Surely they’re better partly because of the BoE?

If we move to Bank of England policy we see that yet again it has wrong-footed itself. In response to the leave vote it has cut Bank Rate and expanded QE which will have adverse effects for both savers and pension funds. On that road a claimed stimulus may yet turn out to be exactly the reverse. When we get the details of the Term Funding Scheme  then we seem set to find out that the “precious” otherwise known as the banks will yet again get special status. How has that worked out so far?

For the rest of us there is no special status and we face the likelihood of both good days and bad days ahead and today was a better day in that sequence. Looking forwards let us muster some humility and sing along with Bob Dylan.

Come writers and critics
Who prophesize with your pen
And keep your eyes wide
The chance won’t come again
And don’t speak too soon
For the wheel’s still in spin
And there’s no tellin’ who
That it’s namin’
For the loser now
Will be later to win
For the times they are a-changin’.





Mark Carney and the Bank of England relax rules for UK banks

A clear feature of the post Brexit referendum situation is a fall in bank share prices and perceived prospects. A chill wind has gone through not only UK bank share prices but also European ones. Bloomberg have published this morning the results of a stress test model produced by New York University and unlike the official efforts it was signalling problems before Brexit day.

Even before Brexit, the model suggested that banks were much more fragile than official stress tests indicated: As of May 31, it estimated that the largest banks in the U.S., U.K., Germany, France and Italy (those with more than $500 billion in assets) would have a combined capital shortfall of $998 billion.

After the referendum it felt that this had happened.

After the Brexit vote, the shortfall rose significantly. As of June 28, it stood at $1.163 trillion, an increase of $165 billion.

Actually the UK is not top of the shortfall list as unsurprisingly it is headed by the United States but food for thought is provided by the fact that France is in second place and not the UK. If we move to relative economic size I note that the shortfall is highest in France at 12% of its Gross Domestic Product whereas the UK is just over 10% and the US a relatively mere 2%.

Some care is need here as we learn something but need to take care how much. Whilst we note that one can construct a stress test which more than the token bank actually fails this one has its own flaw. That is the way that it only looks at the larger banks and so records more problems in countries which have some combination of larger economies and a more concentrated banking system. For example it therefore rates Italy as relatively low risk ( a capital shortfall a bit under 5% of GDP ) because many of its problems are relatively small banks. For example the non performing loans at Monte dei Paschi di Siena that have come to the attention of the ECB are very big for it ( 38 billion Euros) but small relative to the scale used here.  That is why its shares are suspended as I type this at a price 7% below what was only yesterday a record low.

The UK economy

The banks do not exist in a vacuum as they both feed (hopefully anyway) and depend on the underlying economy. Bloomberg put it like this.

Why the pessimism? For U.K. banks, it’s pretty straightforward: Forecasters expect increased uncertainty and other Brexit-related difficulties to undermine economic growth, which in turn will narrow profit opportunities and make it harder for people and companies to pay back loans.

So troubled water is the immediate outlook as we await to see how we bridge it. This morning has brought further news from the front line or at least the Markit Purchasing Managers Index business surveys.

The PMI surveys indicate that the pace of UK economic growth slowed to just 0.2% in the second quarter, with a further loss of momentum in June as Brexit anxiety intensified.

That feeds into a picture where in terms of GDP growth we had been slowing ( 0.7% and then 0.4%) but also into a picture where that latest official industrial ( up 1.6% year on year in April) and manufacturing data had been relatively good.

A possible vulnerability

Whilst there may be issues over the mortgage book in time in the more immediate period we are more likely to see a signal from the unsecured credit which was growing so strongly.

Consumer credit increased by £1.5 billion in May, in line with the average over the previous six months. The three-month annualised and twelve-month growth rates were 10.7% and 9.9% respectively.

The Bank of England

It has a Financial Policy Committee for supervising the banks which is entwined in a spider’s web of bureaucracy with the Financial Conduct Authority and the Prudential Regulatory Authority. Last time the UK has a tripartite structure it failed utterly but I guess in Sir Humphrey’s world it was considered a triumphant model! As to the FPC itself apart from the Governor Mark Carney and perhaps Deputy Governor Ben Broadbent it is made up of individuals that very few people have ever heard of. I do know one other as some time ago I used to work with Clara Furse in the days before she became a Dame. In fact she did come to some attention as her appointment was criticised back in the day but the “serious concerns” of some MPs back then did not stop her being reappointed earlier this year.

What have they told us?

In the past they have continually told us that they are “vigilant”. I have been unkind and pointed out that they may have been vigilant about the Bank of England tea trolley but much less so about the boom in buy to let mortgage lending. This morning however the story has changed somewhat. Let us start with them looking firmly in the rear view mirror.

the UK commercial real estate (CRE) market, which had experienced particularly strong inflows of capital from overseas and where valuations in some segments of the market had become stretched;

Horse meet stable door as of course not only was the Standard Life property fund suspended yesterday but last week other commercial property funds imposed exit penalties. Moving on we see that the FPC has other concerns.

The FPC has monitored these channels of risk closely. There is evidence that some risks have begun to crystallise. The current outlook for UK financial stability is challenging.

So closely is the new “vigilant”. We also get some actual measures of the position.

Equity prices of UK banks have fallen on average by 20%, with UK-focused banks experiencing the largest falls….Between 23 June and 1 July, investment-grade corporate bond yields fell by around 25 basis points. Wholesale debt funding costs for the major UK banks fell by a similar amount. Overall bank funding costs — taking into account any increase in the cost of equity and the change in wholesale debt funding costs — are broadly unchanged since the referendum.

So there is some good news there which is that overall bank funding costs are pretty much unchanged although some have risen and some fallen.

What will they do?

This was announced at 10:30 am today.

The FPC reduced the UK countercyclical capital buffer rate from 0.5% to 0% of banks’ UK exposures with immediate effect . Absent any material change in the outlook, and given the need to give banks the clarity necessary to facilitate their capital planning, the FPC expects to maintain a 0% UK countercyclical capital buffer rate until at least June 2017. …….. It will reduce regulatory capital buffers by £5.7 billion, raising banks’ capacity for lending to UK households and businesses by up to £150 billion.

You may note that this change has an implied multiplier of up to 26 from the change in bank capital rules. To stop some of the money leaking away this a ban on increases in dividends and also stock buybacks have been imposed.


This is a quantity move by the Bank of England and is a type of what is called macroprudential policy. In terms of numbers in his press conference Governor Carney said that net bank lending in the UK was £60 billion last year or 40% of the change in capacity announced today. Also these rules apply to three-quarters of the UK’s banks who make some 90% of the total of bank lending. So far the Governor’s performance has been much more like that on the Friday morning post the Brexit referendum which reminds me of this from Meatloaf.

‘Cause two out of three ain’t bad

However there is a catch which is that as for example Governor Kuroda has found in Japan and Mario Draghi in Europe you can expand the supply of credit all you like at the central level but will there be demand for it? Also will the banks respond to the central changes and actually supply credit as we wonder how the banks will interpret the word “viable” that Governor Carney has on repeat today.

Also a long running theme of mine gets a bit of emphasis.

the financing of the United Kingdom’s large current account deficit, which relied on continuing material inflows of portfolio and foreign direct investment;




Mark Carney is the very model of a modern central banker

Yesterday at 4 pm the Governor of the Bank of England spoke to the nation. I have to confess that before the event I wondered why? He had already made his post Brexit referendum statement where he had performed well and said the right things.  At a time of crisis the central bank should do as he did and confirm it will supply liquidity and continue to perform its duties. It was only yesterday that the issue of bank funding costs was raised in the comments section so this move was sensible.

As a further precaution, reflecting the possibility that heightened uncertainty may last a while longer, today the Bank of England is announcing that it will continue to offer Indexed Long-Term Repo operations on a weekly basis until end-September 2016. This will provide additional flexibility in the Bank’s provision of liquidity insurance over the coming months.

So in looser language it is willing to splash the cash in liquidity terms for three months and this should help to keep the UK financial system from any danger of  freezing up. This adds to the back-stop he put in place with his first speech.

And as a backstop, in order to support market functioning, the Bank of England continues to stand ready to provide more than £250bn of additional funds through its normal facilities.

I also have some sympathy with him on this front.

In Tim Geithner’s famous dictum, “plan beats no plan.”

As currently he is dealing with a UK political establishment which is in flux represented by a combination of hiding,backstabbing, denial and disarray. So far so good for Governor Carney.

The model of a modern central banker

These days they respond to events with ever lower interest-rates and extraordinary monetary policies and we got a hint with a large pointed arrow on it from Governor Carney.

the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.

This was immediately translated as being a signal for a lower Bank Rate and additional Quantitative Easing to the £375 billion stock that the Bank of England currently holds. Before I say what I think he will do I would like to show the financial market reaction to it.

UK Markets

There were two very strong market moves in response to the speech. The first fits in with one of the themes of this blog which is the worldwide push to lower interest-rates and yields. Mark Carney’s words lit the blue touch-paper as UK Gilt prices rose like a rocket. There are reports that the UK 2 year yield went negative briefly which would be the first sighting of such a thing in the UK I can recall. I wonder if that is a misprint but the surge saw our 10 year Gilt yield fall to 0.8% this morning and the 30 year to 1.7%.

The UK FTSE 100 surged also and ended the day above 6500 where it remains. So it is higher than before the Brexit result due to two main factors. The first is due to the lower UK Pound £ as so many of the companies have foreign earnings. The second is the fall in yields above which make any reliable dividend stream look increasingly attractive. As Governor Carney had met the banks the day before an awkward possible “early wire” perspective is provided as the FTSE 100 rallied over 200 points that day in what was then a surprising move. A little care is needed as outside the top 100 the performance is weaker shown by the fact that the FTSE All Share is up only 1% since the pre Brexit close.

By contrast the move in the UK Pound £ was relatively sedate. Yes it fell but then it rallied again as knee-jerk responses met the view that this was what most people expected him to want to do. So the UK Pound fell by around 1%.

Will this help?

In theory yes but then we hit the issue of the fact that the Japanese and European experience has been patchy at best. Yes the Euro area has been putting in a better performance in 2016 but much of that in my view is due to lower oil prices and inflation leading to higher real wages. However if we return to the central banking play book the higher equity prices will stimulate the economy via wealth effects and the lower bond yields will make more economic activity viable.

If that was a magic wand we would not be where we are would we? Also whilst the central bankers may claim that people can borrow cheaply we cannot be sure that the funds will go to the right places. After all the much trumpeted Funding for Lending Scheme (FLS) which started 4 years ago can be measured by the large number of times official sources use the word “counterfactual” in response to it.

On that subject I expect the FLS to be fired up and boosted again probably sooner rather than later.

Forward Guidance

This is where life gets a lot more awkward for Mark Carney as his Forward Guidance predicted higher interest-rates and the UK moving towards a Bank Rate of 2.5% or so. The road to this was signposted at the Mansion House speech just over 2 years ago.

It could happen sooner than markets currently expect.

That was a clear hint to which financial markets responded. There are costs to that but even if that does not bother you much what about those with mortgages and businesses who locked in borrowings to take advantage of interest-rates which he was telling them were good? Instead they have been left far behind as mortgage rates have plunged.

In reality Forward Guidance Mark 20 is for Bank Rate cuts presumably to 0% which I note is at the time horizon of policy action ( around 2 years) during which no interest -rate rises took place and Mark Carney never even voted for one.


This was another awkward bit for Mark Carney yesterday so let is consider his mission statement.

Promoting the good of the people of the United Kingdom by maintaining monetary and financial stability.

Now let us see how that fits with these words.

Uncertainty over the pace, breadth and scale of these changes could weigh on our economic prospects for some time……economic post-traumatic stress’

You might have thought with his and the Bank of England’s dreadful forecasting record he might have shown some discretion. After all claiming certainty of a sort is what got him into his Forward Guidance mess. Also a central bank should act to reduce issue around uncertainty and not feed it whatever the Governor’s own personal views.


It was hard not to have a wry smile at the Governor of the Bank of England hinting at something that I have predicted for so long which is a Bank Rate cut! Let me be clear that down at these levels such moves have so many unintended consequences they may even be contractionary in my opinion. Also there is the issue that whilst he tried to say he was giving his own opinion Mark Carney was in effect tying the hands of his Monetary Policy Committee colleagues behind their backs.

In my view, and I am not pre-judging the views of the other independent MPC members, the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.

Yes you were pre-judging them Mark because you had told us this.

As required by our remit, the MPC identified that the most significant risks to its forecast concerned the referendum.15 This was the view of all nine independent members of the MPC.

I would not be pleased if I was one of the other eight. A better approach would have been to call an emergency meeting and actually vote. This way around all we have are more Open Mouth Operations as we wonder how many of them are in fact Carney’s cronies. The more I am officially told that someone is “independent” the more I wonder about the reverse.

As to analysis there was this from Kristin Forbes back in October 2014.

Over periods longer than one quarter, however, a stronger real exchange rate is correlated with a significant fall in total exports……..a 10% appreciation of sterling – holding all else equal – is predicted to cause a 3.1% fall in export volumes over the long term.

In conclusion she told us this.

I discussed how sterling’s strength has created some drag on the trade balance, and thereby aggregate demand, growth, and employment.

Now currently we have pretty much the reverse due to sterling’s fall. I would be thinking of that right now.

Also there is fiscal policy when you can borrow for a long time very cheaply. There are possibilities there which did not exist before. Back on June 10th I discussed the issue here as the perspective on fiscal policy has shifted considerably with Gilt yields where they are. I have sympathy with Governor Carney in the sense that there is no one in authority to discuss this with but going forwards it is an option and of course his promised interest-rate cuts would only really work in say 18 months time so too late for any immediate issues.

But let me leave you with my song for Mark Carney with thanks to the Kinks.

And when he does his little rounds
‘Round the boutiques of London Town
Eagerly pursuing all the latest fads and trends
‘Cause he’s a dedicated follower of fashion

On The Radio

I will be on Share Radio ( which is on UK DAB plus the internet) from 1 pm to 1:30 pm today and it is a sign of the times I was on the Morning Money show as well earlier.

What is the economic impact of the post Brexit UK Pound fall?

Yesterday saw England rudderless and confused with a poor performance from Sterling. But enough about the football although let me congratulate Iceland and wish them good luck in the next round. As we have a spell of market calm this morning with the FTSE 100 up 2% at 6100 as I type this and even the poor battered UK Pound £ rising above US $1.33 there are opportunities to take stock. An early lesson is a type of shock effect both emotionally and in the way that financial markets can move far far faster than the economy can respond. Whilst it has many flaws in other areas rational expectations economics has some success here although of course the obvious rejoinder is what do we rationally expect now?

Ratings Agency Downgrades of the UK

Once upon a time these bodies bestrode the world and economic agents were afraid of them . If they sliced a notch off a credit rating then the “bond vigilantes” would ride into town driving sovereign bond yields higher and making it more expensive for that country to borrow. The credit crunch hurt them in two ways starting with the way that debt they rated as “AAA” turned out to be a lot further down the alphabet in reality. Also as events like the Euro crisis hit they ended up chasing events rather than leading. They have survived because the need for measurement and analysis has risen in the credit crunch era and that has offset to some extent the plummet in their credibility.

So let us get to what they told the UK yesterday. From Standard and Poors

Ratings On The United Kingdom Lowered To ‘AA’ On Brexit Vote; Outlook Remains Negative On Continued Uncertainty.

This had particular emphasis for headline writers as it was the last of the ratings agencies to have the UK as AAA. Around 5 years ago I pointed out that we did not really deserve such a rating as whilst we have our own currency and could always print as much as we wanted that would likely be accompanied by a lower value of the UK Pound £. Also Fitch wanted a slice of the action as Reuters reported.

Fitch Ratings cut Britain’s credit rating on Monday and warned more downgrades could follow, joining Standard & Poor’s in judging that last week’s vote to leave the European Union will hurt the economy.

Fitch downgraded the United Kingdom’s sovereign rating to “AA” from “AA+” and said the outlook was negative – meaning that it could further cut its judgment of the country’s creditworthiness.

Some kept a sense of humour about it all.

Fitch downgrades UK to AA/neg now (@NicTrades )

A Wider Perspective

These days the story does not end there as you see there are much wider trends and themes at play. Overnight we have seen yet another example of the move lower in sovereign bond yields.


Apologies for the capitals used. If we move beyond that there is plenty of scope for reflection that the highest sovereign yield in Japan is not even 0.1%! Each time we see such a move I point out that business models which depend on yield such as pensions and annuities cannot work anymore.  The ten-year yield is now -0.22% which fits poorly with all the proclamations of economic recovery. Overall we see this.

Japan’s long yields on the road to zero. 40-year falls to record 0.08%, some 80% of JGB market is now sub-zero ( @HaidiLun )

Back in the UK

The story of the bond vigilantes riding into town has quite a reverse here. It was only yesterday that I pointed out that our benchmark 10 year Gilt had seen its yield fall below 1%. So yields are surging today in response to the downgrade? Er well no, as it is at 0.97% as I type this so on the edge of all-time lows ( since 18th century according to Ed Conway of Sky). This is a little higher than the lowest of yesterday but not much and this of course is a response to the higher level of the stock market. The thirty year Gilt yield is at 1.83% which in terms of my time following it is simply incredible.

So those looking for a response to the ratings downgrade only have inverse responses with Gilt yields extraordinarily low and the stock market and UK Pound £ rallying.

The impact of the lower UK Pound £

There have been a lot of headlines about the UK Pound £ saying it is a 31 year low or was yesterday. Many have forgotten to point out this is against the US Dollar which of course has been in a strong phase and overall we have seen falls but mostly smaller ones elsewhere such as to 1.20 versus the Euro.

As we have reached a calmer phase I can complete some calculations as the Bank of England only compiles its trade weighted index daily and is based on yesterday’s close. Thus we came into 2016 at just over 90 and are now at approximately 80. So using the old Bank of England rule of thumb we have seen a move equivalent to a Bank Rate reduction of 2.5% so far in 2016. Compared to this time last year it is more like 3.25%.

We can expect an inflationary push as well especially as the fall has been loaded towards the US Dollar. Many basic commodities will be seeing a push higher from this as it added to a falling trend anyway although there will be some offsetting from the falls in the oil price over the past few days. Over the past year the oil price (Brent crude oil -24%) has fallen more than the UK Pound £ (-15%) but over the last week it has fallen by less. So upwards but not by as much as those who have missed the oil price fall have suggested.


There continues to be much to consider as a multitude of economic events occur together. What it shows us is how tightly the world financial and economic system is tied together. Some of this is good as in manufacturing efficiency but some of it is not so good as complacency and bluster about the banks turns to near panic in an instant. On that subject whilst he is not always right this poses a question. From De Welt.

George Soros is betting 100 million Euros against Deutsche Bank

Meanwhile we have received an increase in uncertainty followed by an inflationary economic boost provided by the fall in the UK Pound £. Just what some at the Bank of England have called for over the years so it is no surprise to see former Governor Baron King reappearing in the news. In fact quite a few economists have called for that although it is nice to see the Resolution Foundation backing up one of my themes.

Housing wiped out 2/3 of post-2002 income gain. RF report on underplayed role of housing in living standards squeeze.

Steve McClaren

If you need some light relief at a difficult time you should watch this rather spectacular effort.