HAMISH MCRAE: The economy is due some optimism as we edge ever closer to Brexit 


Boris Johnson is betting a burst of ‘animal spirits’ will give a boost to the British economy, and he may just be right. 

The idea that people can be irrationally optimistic goes back a long way – Jane Austen observed this in Pride And Prejudice – but it was the great economist John Maynard Keynes who famously applied the notion to economics.

In 1936, he described ‘the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations’.

Boris Johnson is betting a burst of ‘animal spirits’ will give a boost to the British economy

Boris Johnson is betting a burst of ‘animal spirits’ will give a boost to the British economy

We have certainly had our share of glum expectations about the impact of Brexit on the economy in the string of forecasts predicting that it would head into a slump following the referendum decision to leave the EU.

Up to now, largely thanks to the resilience of consumers, the economy has kept growing, actually slightly faster than that of the eurozone. 

But in the last three months, growth does seem to have stalled, so maybe the uncertainty is starting to get to people.

Of course, it is not just us. US growth is down to just over 2 per cent, which does not sound bad by our standards but is disappointing to Americans.

And last week, the outgoing President of the European Central Bank, Mario Draghi, said that the European economic outlook was getting ‘worse and worse’. We will get figures this week that are expected to show that the eurozone economy barely grew in the second quarter.

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The possibility of a No Deal Brexit does not help, because it would surely lead to serious disruption. If almost the entire business community says it is worried about the impact, you have to take those worries seriously. 

Not so optimistic: Outgoing President of the European Central Bank, Mario Draghi, said that the European economic outlook was getting ‘worse and worse’

Not so optimistic: Outgoing President of the European Central Bank, Mario Draghi, said that the European economic outlook was getting ‘worse and worse’

But investors’ long-term outlook is more optimistic, even ahead of the elevation of Boris Johnson to PM. 

The latest survey by the Swiss Bank UBS of High Net Worth Individuals (HNWIs), showed that while half thought Brexit would cause short-term harm to the economy, a majority thought that it would be positive over the next ten years. That positive view should be taken seriously too.

None of this means that our new PM’s evident animal spirits will revive those of the nation as a whole. 

There is a path towards a deal with Europe, involving a fix on the Irish border issue and the promise of a solid trade deal with the EU once the exit agreement is approved. But it is a narrow path and it would be quite possible for it to be blocked. 

What we do know is that there will be a boost to Government spending, coupled with some tax cuts, this autumn.

The fiscal deficit will be allowed to climb a bit. Austerity will be declared dead. The Chancellor will, so-to-speak, be putting the money where the PM’s mouth is. Besides, consider this modest practical evidence of British consumers’ resilience. 

Last week, our biggest car manufacturer, Jaguar Land Rover, revealed poor second quarter results. Sales to China were down nearly 30 per cent. 

Sales to Europe and America were down too. And sales in the UK? They were a tiny bit up. You don’t splash out on a new Range Rover unless you are feeling a little chipper – and that was before Boris set to work.

We will learn something this week about the animal spirits in America. The slowdown there has been slight, but it looks certain that the economy will get a boost from a cut in interest rates from the Federal Reserve. The debate there is whether it will be a quarter per cent cut or a half per cent one.

This, coupled with the further easing of monetary policy by the ECB in September, heralded by Mario Draghi in those ‘worse and worse’ remarks, raises the question about the effectiveness of monetary policy to boost an economy. It seems to have worked in the US, but it does not seem to have worked in Europe. Why?

I suspect it has something to do with the way Americans respond to changes in their wealth. 

Cheap money boosts asset prices. When the value of their house or their investments go up, they spend more. 

If they can re-mortgage their house at a lower rate, they use the extra dollars they have saved to boost their living standards. 

But for continental Europeans the fact that their mortgage rate has gone down means – if they have a mortgage at all – they can pay it off faster.

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