risk and the economy - the chartered institute of ... and events... · • three months after...
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Risk and the Economy
Dr. John GlenCranfield School of Management and CIPS
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Outlook for the UK economy and Brexit
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Medium‐term forecasts, November 2016
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/569316/PU797_Forecast_for_the_UK_Economy_Nov_2016_355.pdf
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Medium‐term forecasts, February 2016
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What has happened in the UK economy since the vote
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UK consumer confidence
http://www.gfk.com/en‐gb/insights/report/uk‐confidence/British Retail Consortium, BDO, Visa and ONS
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Household finance expectations
• Households signal strongest inflation expectations since late‐2014
• Year ahead financial expectations most downbeat for three years
• Household income remains close to stagnation
• Majority of UK households anticipate a base rate rise in next 12 months
• Some signs that households are worried about their employment prospects
• Household leveraging back to 2007 levels (think unsecured lending and credit cards)
https://www.markiteconomics.com/Survey/PressRelease.mvc/9771daca34cc4c7da7a50b82a9f584bf
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How Banks create Money
Assets Liabilities
Cash 100 Deposit 100
Deposit 900Loans 900
10001000
Cash ratio = 10%
http://www.bankofengland.co.uk/monetarypolicy/Pages/qe/default.aspx
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GBP currency movements
• Fall in the value of the pound should cause import inflation
• Should make exports more competitive
• Could lead to on‐shoring of supply chain
http://www.exchangerates.org.uk/GBP‐USD‐exchange‐rate‐history.html
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Impact on Trade
• Key issue is increase in import prices
• Demand from the EU is 12% of final demand and supports 3.3 million jobs
• Material and fuel prices increased by 7.6 % in year to August 2016, fastest rate of increase since December 2011
• Had only increased 4.1% in year to July 2016
• Exports of services should go up, if they continue to be produced here.
• Tourism has seeen a impact with an increase in passengers flying into the UK
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Interest rates and QE
• Bank of England cut interest rates from 0.5 to 0.25%
• An extra £70bn of QE
• ‘Term funding scheme’ (£100bn). Cheap money for high street banks from the B of E.
• Worries about the transmission mechanism (remember M4)
• Impact on pensions and the pension funding gap
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Growth• Three months after Brexit growth 0.5%
• Better than expected 0.3%
• Less than three months before Brexit 0.7%
• Federation of small businesses finds that confidence levels have dropped in SMEs
• Forecasts for 2017 significantly downgraded (but)
• CIPS/MARKIT construction index 46 (July) from 52.6 (October), increased confidence, worries about sourcing raw materials, but this could accelerate on‐shoring.
• !% reduction in growth wipes out the £280 billion per week we get back by not contributing to the EU Budget
• Autumn statement suggested growth would be 2.4% less than would otherwise have been the case up to 2020‐21
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Impact on investment
• Nissan will build the new Qashqai and X‐trail in UK following ‘assurance’ from the PM
• G4S ‘shrink’ and Lloyds axe 3000
• Japans Softband buys ARM for £24bn
• GSK announces £275 million
• McDonalds announce the creation of 5000 additional jobs
• This is where the big impact is expected to occur with the ‘uncertainty’ around Brexit.
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Short term impacts
• Negative impact in short term from brexit will be associated with
Uncertainty impacting investment decisions
Potential capital flight
Transition effect, It is assumed that the UK will be less open to investment and trade under any alternative to the EU in the short run
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Impact of Brexit on public finances
http://www.resolutionfoundation.org/media/blog/the‐autumn‐statement‐debate‐has‐focused‐on‐the‐public‐finances‐but‐the‐impact‐on‐family‐budgets‐is‐just‐as‐stark/
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Sectoral impact of Brexit
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Finance
• Highly unlikely that EU countries will allow unfettered access to financial service markets
• Norway and Switzerland do not enjoy full pass‐porting rights.
• Brain drain to Paris and Frankfurt
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Retail
• Key issue is the extent to which consumer confidence holds up
• Dislocation of EU wide supply chain agreements and regulatory frameworks.
• Brexit may close the door on the Single Digital Market, while 15% of EU consumers shop cross border in the physical retail space 75% of them do in the digital space.
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Automotive
• Toyota 90% output exported to EU
• Fully integrated into an EU wide supply chain
• We run a big deficit in parts £28 v £10 billion
• Could be beneficial if we can agree free trade negotiations with non EU countries, warning we started free trade talks with India in 2007!
• Hard brexit =10% tariff
• We would have to comply with EU regulations and have no say in them (re‐tooling cost)
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Energy
• Makes sense to remain inside the European energy framework
• This will help keep costs down and increase energy security
• We need to invest in capacity, the impact of post brexit on our ability to raise funds will be key
• Would have to comply with regulations that facilitate inter‐connectivity
• UK emission targets are far more ambitious than Europe so therefore no obvious regulatory benefit in terms of reduced regulatory burden
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Healthcare
• EU accounts for the majority of UK Pharma exports (56%) circa £50 bn
• Non EU trade growing faster
• Harmonising IPR, Clinical trials, Quality standards etc does reduce cost
• Could undermine contract research where UK is number 1 in Europe
• Basic research
• Investor confidence.
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Thank you&
Questions