A look at key UK monetary policy issues Philip Shaw Chief - - PowerPoint PPT Presentation

A look at key UK monetary policy issues

Philip Shaw Chief Economist Investec

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Philip Shaw, Investec

A look at key UK monetary policy issues

BREXIT

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Philip Shaw, Investec

Brexit timeline

29 Mar 2017: Article 50 invoked 6 Jul 2018: Chequers plan agreed amongst the then Cabinet 25 Nov 2018: Draft EU/UK agreement signed off at EU Summit Dec 2018: Govt pulls meaningful vote (was planned for 11 Dec) 12 Dec 2018: Theresa May survives Tory leadership confidence vote 15 Jan 2019: Govt loses meaningful vote in Commons 29 Jan 2019: May’s ‘Plan B’ gets backing with a ‘backstop’ amendment Mid-Feb? Another meaningful vote and/or statement on May’s plan. 29 Mar 2019: UK leaves EU (?) 31 Dec 2020: UK leaves implementation (transition) period?

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Philip Shaw, Investec

Chequers - the govt’s plan ahead?

How to go forward?

• Simple free trade

agreement implies customs & regulatory delays at UK/EU border.

• Customs union with

EU prevents UK striking 3rd party trade deals.

• Huge issue for UK

industry.

• Government

Chequers plan seeks best of both worlds. Goods trade

• Free trade zone in

goods.

• UK accepts relevant

EU rulebook.

• Tariffs from 3rd

party imports achieved through collection and distribution of tariffs at UK border and distributed to EU (Facilitated Customs Arrangement). Services arrangements?

• Chequers says

relatively little about services.

• ‘regulatory flexibility’
• In financial services,

looser ties (compared with passporting).

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Philip Shaw, Investec

Withdrawal Agreement (WA)

Leaving arrangements dealt with in 585 pages of text. The WA covers the financial settlement (€41bn) and rights of EU citizens in UK (relatively uncontentious).

• From 2021 (post-transition), UK would be in a customs union with EU. In addition,

NI would also be in regulatory alignment with EU. Two problems here:

• UK cannot unilaterally withdraw from backstop.
• Some goods checking necessary between GB and NI.

The NI/RoI border remains a huge sticking point. In terms of the backstop as currently negotiated… UK in the backstop in the absence of a ‘frictionless’ border between NI/RoI. Or may extend transition by 1 or 2 years. WA is a legal treaty.

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Philip Shaw, Investec

Political Declaration (PD)

• 26 pages long! (Original version was 7 pages).
• Openly worded.
• Includes arrangement to ‘create a free trade area, combining deep

regulatory and customs cooperation’.

• On services, talks of ‘ambitious, comprehensive and balanced

arrangements’. Financial services - assessment of equivalence… PD looks at the future relationship between UK and EU. Consistent with Chequers Plan, but without committing… (‘can lead to a spectrum of different outcomes for administrative processes as well as checks and controls’) PD is NOT legally enforceable (but parties will use ‘best endeavours’ to negotiate details).

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Philip Shaw, Investec

Parliamentary make up

Diagram shows the results of the 2017 general election (i.e. does not reflect MPs who have been suspended or resigned from the party whip). Seven Sinn Féin MPs not shown due to party’s policy of abstentionism. Key Speaker Conservative Labour SNP Lib Dem DUP Independent Plaid Cymru Green Party

Source: Electoral Commission

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Philip Shaw, Investec

Meaningful vote (15 Jan)

Labour MPs, 248 Conservative MPs, 196 Rebel Conservative MPs, 118 SNP, 35 Lib Dem, 11 DUP, 10 Rebel Labour MPs, 3 Independent, 5 Independent, 3 Plaid Cymru, 4 Green, 1 100 200 300 400 500 Voted against the deal (432) Voted for the deal (202) The chart shows numbers of votes. Excludes ‘tellers’, the Speaker and deputies. Source: BBC research, Investec

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Philip Shaw, Investec

The issues for Parliament

Compromise is required. Note 118 Tories voted against PM’s deal. May lost by 230. If all Tories had backed deal, PM would have won (without DUP)! The problem is that Parliament is very divided. Can UK agree better terms on backstop and PD? Will Ireland allow backstop compromise to prevent ‘no deal’? How many Labour MPs will back govt at last minute? Now back to Brussels… For more negotiations or to legislate in Westminster? European Parliament (EP) elections are in late May and new European Parliament sits in early July. Also, all EU27 have to agree. Extension to Article 50

• possible. But for how

long? Revoking Article 50 (which is legal, according to ECJ) would be worse. Political cost of a delay (to government) could be huge. …(from delay in agreement to totally dysfunctional). But risk of port snarl ups is real. No deal hides a number of different scenarios…

Our baseline forecasts are based on a deal going through

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Philip Shaw, Investec

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Philip Shaw, Investec

Leaving all that behind…

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Philip Shaw, Investec

We now have monthly UK GDP data…

Source: Macrobond

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Philip Shaw, Investec

Labour market has been robust

Source: Macrobond

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Philip Shaw, Investec

What is productivity, and why is it important?

Low GDP growth, high jobs growth implies low (labour) productivity growth. Productivity (output per hour) growth averaged 2% per annum pre crisis. Since 2010 this is now a little more than 0.5%. Does this matter? YES!!! Determines trends in living standards. Why is it weak?? Financial crisis? Lack of investment? Wrong type of jobs? Education?

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Philip Shaw, Investec

Productivity growth in pictures – annual change in output per hour worked

Annual % change in GDP per hour worked

Source: Macrobond

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Philip Shaw, Investec

BoE policy – what will the MPC do?

Background

• ‘Trend’ growth has

slowed.

• Unemployment: 4%.
• There is little spare

capacity (BoE sees full employment at 4.25%).

• MPC concerns – tight

labour market / higher pay growth / medium- term inflation pressures

• CPI inflation close to

target (2.1%).

• Uncertainties over

Brexit (especially risk

• f ‘no deal’).

Our assessment

• Current Bank rate at

0.75% (MPC hikes Nov ‘17 and Aug ‘18).

• No change likely 7 Feb.
• But we see Bank rate

at 1.25% at end-2019.

• Why?
• GDP growth of 1.7%.
• Baseline forecast of a

Brexit deal being struck (!).

• Global economy still

reasonably robust.

Points to note

• Fiscal policy expansive

(£25bn from last two Budgets).

• Some relationship

between unemployment and pay growth has returned?

• What will the MPC do
• n a ‘no deal’ Brexit –

balance of supply and demand??

• Trade talks between

US and China are critical – major factor determining global growth.

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Philip Shaw, Investec

Is the Phillips Curve relationship re-establishing itself (in another place)?

Source: Macrobond

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Philip Shaw, Investec

Markets are not pricing in the next hike in Bank rate until 2020

#Market curve takes account of spread between SONIA and Bank rate.

Implied Bank rate from OIS curve versus Investec forecast (%)#

Source: Macrobond, Investec

0.50 0.75 1.00 1.25 1.50 Feb-19 May-19 Aug-19 Nov-19 Feb-20 May-20 Aug-20 Nov-20 SONIA (29/11/2018) SONIA (28/01/2019) Investec Economics Hike priced in more than one year later than Investec forecasts

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Philip Shaw, Investec

A local cartoon…

Source: Daily Telegraph

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Philip Shaw, Investec

THANK YOU!

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Philip Shaw, Investec

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