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

A look at key UK monetary policy issues BREXIT Philip Shaw, Investec www.ukalma.org.uk

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? Philip Shaw, Investec www.ukalma.org.uk

Chequers - the govt’s plan ahead? Services How to go forward? Goods trade arrangements? • Simple free trade • Free trade zone in • Chequers says agreement implies goods. relatively little about customs & services. • UK accepts relevant regulatory delays at EU rulebook. • ‘regulatory flexibility’ UK/EU border. • Tariffs from 3rd • In financial services, • Customs union with party imports looser ties EU prevents UK achieved through (compared with striking 3rd party collection and passporting). trade deals. distribution of tariffs • Huge issue for UK at UK border and industry. distributed to EU (Facilitated • Government Customs Chequers plan Arrangement). seeks best of both worlds. Philip Shaw, Investec www.ukalma.org.uk

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). The NI/RoI border remains a huge sticking point. In terms of the backstop as currently negotiated… • 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. 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. Philip Shaw, Investec www.ukalma.org.uk

Political Declaration (PD) PD looks at the future relationship between UK and EU. • 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… 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). Philip Shaw, Investec www.ukalma.org.uk

Parliamentary make up Key Speaker Conservative Labour SNP Lib Dem DUP Independent Plaid Cymru Green Party 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. Source: Electoral Commission Philip Shaw, Investec www.ukalma.org.uk

Meaningful vote (15 Jan) Plaid Cymru, 4 500 Independent, 5 Green, 1 DUP, 10 400 SNP, 35 Rebel Rebel Labour Conservative 300 Lib Dem, 11 MPs, 3 Independent, 3 MPs, 118 200 Labour MPs, Conservative 100 248 MPs, 196 0 Voted against Voted for the deal (432) the deal (202) The chart shows numbers of votes. Excludes ‘tellers’, the Speaker and deputies. Source: BBC research, Investec Philip Shaw, Investec www.ukalma.org.uk

The issues for Parliament The problem is that Compromise is required. Note 118 Tories voted against PM’s deal. Parliament is very May lost by 230. If all Tories had backed deal, PM would have won divided. (without DUP)! Can UK agree better terms on backstop and PD? Now back to Will Ireland allow backstop compromise to prevent ‘no deal’? Brussels… How many Labour MPs will back govt at last minute? Extension to Article 50 For more negotiations or to legislate in Westminster? possible. But for how European Parliament (EP) elections are in late May and new long? European Parliament sits in early July. Also, all EU27 have to agree. Political cost of a delay (to government) could be huge. Revoking Article 50 (which is legal, according to ECJ) would be worse. No deal hides a number of different …(from delay in agreement to totally dysfunctional). But risk of port scenarios… snarl ups is real. Our baseline forecasts are based on a deal going through Philip Shaw, Investec www.ukalma.org.uk

Philip Shaw, Investec www.ukalma.org.uk

Leaving all that behind… Philip Shaw, Investec www.ukalma.org.uk

We now have monthly UK GDP data… ����������������������� ��������������������������� Source: Macrobond Philip Shaw, Investec www.ukalma.org.uk

Labour market has been robust Source: Macrobond Philip Shaw, Investec www.ukalma.org.uk

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? Philip Shaw, Investec www.ukalma.org.uk

Productivity growth in pictures – annual change in output per hour worked Annual % change in GDP per hour worked Source: Macrobond Philip Shaw, Investec www.ukalma.org.uk

BoE policy – what will the MPC do? Background Our assessment Points to note • ‘Trend’ growth has • Current Bank rate at • Fiscal policy expansive slowed. 0.75% (MPC hikes Nov (£25bn from last two ‘17 and Aug ‘18). Budgets). • Unemployment: 4%. • No change likely 7 Feb. • Some relationship • There is little spare between capacity (BoE sees full • But we see Bank rate unemployment and pay employment at 4.25%). at 1.25% at end-2019. growth has returned? • MPC concerns – tight • Why? • What will the MPC do labour market / higher • GDP growth of 1.7%. on a ‘no deal’ Brexit – pay growth / medium- • Baseline forecast of a balance of supply and term inflation pressures Brexit deal being struck demand?? • CPI inflation close to (!). • Trade talks between target (2.1%). • Global economy still US and China are • Uncertainties over reasonably robust. critical – major factor Brexit (especially risk determining global of ‘no deal’). growth. Philip Shaw, Investec www.ukalma.org.uk

Is the Phillips Curve relationship re-establishing itself (in another place)? Source: Macrobond Philip Shaw, Investec www.ukalma.org.uk

Markets are not pricing in the next hike in Bank rate until 2020 Implied Bank rate from OIS curve versus Investec forecast (%) # 1.50 1.25 1.00 0.75 Hike priced in more than one year later than Investec forecasts 0.50 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 # Market curve takes account of spread between SONIA and Bank rate. Source: Macrobond, Investec Philip Shaw, Investec www.ukalma.org.uk

A local cartoon… Source: Daily Telegraph Philip Shaw, Investec www.ukalma.org.uk

THANK YOU! Philip Shaw, Investec www.ukalma.org.uk