Looking to the future: PM Boris Johnson
The uncertainties mount. But right now there are too many people giving their opinions about what ought to happen and not enough trying to work out what will happen. What matters to most of us is the latter, so let’s try to correct that imbalance. First the uncertainties, and then what the outcomes might mean for all of us.
There are three particular areas of confusion: what happens to the Brexit trade deal; how the new partial lockdowns will affect the economy; and whether the policies of a new US President would change the global economic outlook.
As far as the Brexit negotiations are concerned, this seems a weekend of high drama. That drama will continue for a few weeks yet. But while we cannot see the detail of the denouement, we can be confident that what will happen will be somewhere between a nominal deal that still slows down trade with Europe, and no formal deal but lots of little side agreements that keep trade more or less moving.
Side deals? Look, I think the Netherlands will want to find a way of selling the UK its tomatoes – did you know they are the largest tomato exporters in the world? And Ryanair, when we get flying again, will want to fly its planes into the UK, its second biggest market after Italy. It will be more messy but a way will be found.
Partial lockdowns are happening all over Europe and as a result the entire region will see a pause in the recovery. Real-time data – things like restaurant bookings and traffic congestion – show that the recovery was flattening even before these new restrictions.
Now that pause will be longer, with the result that the final quarter of the year will see a lot of bad company news and, I am afraid, a lot of redundancies too. Assuming that the new restrictions are effective, growth should have resumed by December. Our experience of the spring shows that if you whack things down they do bounce back, so it would be reasonable to expect a decent rebound. America?
The politics may be confusing but the economics are simple. Both fiscal and monetary policy will remain extremely expansionary whatever happens on November 3. The world’s largest economy will continue to flood the world with dollars, supporting economic growth and also supporting asset prices everywhere.
If you accept all this, now look at the consequences.
Brexit will continue to keep UK assets unfashionable among global investors for some time yet. If there is a trade deal the rhetoric will be that it is a bad one for the UK, does not encompass services, does nothing for the City, and so on. If there is no formal deal it will be the same story but a bit louder. Those of us who believe both sterling and UK assets are undervalued will have to accept they may remain so for a while.
Fashions change. Remember how just ahead of the financial crash how fashionable sterling was on the markets? On September 14, 2007, the day when queues outside Northern Rock branches forced it to go to the Bank of England for emergency support, the pound was trading at $2.03. By the end of 2008, it was down to $1.43.
Now the pound is even more unfashionable – which as an intuitive contrarian gives me confidence about the future. It will take time for global confidence in the UK to return. Meanwhile, for those with patience, a secure income and liquid funds this cannot be a bad time to build up holdings in UK companies, particularly since dividends are now being rebuilt.
The lockdown pause through the coming weeks means that we will continue to have a run of bad headlines. We had some last week from the IMF, which forecast that every major economy other than China would have only a partial recovery next year.
In practical terms, though, what will matter to us is whether our incomes are secure. For anyone with a secure job this is a good time to fix family finances. The spring lockdown saw the UK savings rate, usually around 7 to 10 per cent, shoot up to more than 29 per cent. This was – and is – a once-in-a-lifetime opportunity to pay off those credit cards for those fortunate to have a steady income. For others, this will be another blow.
And US economic policy? It is a point made here before but worth making again. The flood of dollars has to go somewhere. The Fed is putting a floor under asset prices, in the US in the first instance but in practice elsewhere in the world too. Whatever people feel about American politics, in the short-term we should be grateful for its financial vigour.