As published in City AM Wednesday 27th March 2019
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As published in City AM Wednesday 9th January 2019
Image: Street Art by Aesthetics of Crisis under CC BY 2.0Read More
As published in City AM Wednesday 19th December 2018
Image: Theresa May by Arno Mikkor under CC BY 2.0Read More
The fire and the fury rage from day to day around the outcome of the Brexit process.
The discussion has lost sight of the longer-term context in which both the UK and the EU will operate, regardless of the precise deal which is or is not struck.
In the 1960s, the countries which are now in the EU-bloc represented just under 30 per cent of world output. This has already fallen to less than 15 per cent.
And on any reasonable extrapolation of trends, it will dip under 10 per cent at some point in the next two decades.
This does not mean that Europe is getting poorer. Far from it. It means that the rest of the world, especially Asia, has been becoming richer much faster.
The Brookings Institute calculations released last week were a marvellous piece of news.
For the first time in human history, just over 50 per cent of the world’s population, or some 3.8bn people, live in households with enough discretionary expenditure to be considered either “middle-class” or “rich”.
This has been achieved by capitalism. Until the 1980s, for example, in their own ways both India and China were centrally planned economies. Once they shifted to the principles of market-based economies, they have boomed.
The Brookings authors estimate that in 2030 – just a decade and a bit away – the middle-class markets in China and India will account for $14.1 trillion and $12.3 trillion, respectively.
This compares to their projection of the US middle-class market at that time of $15.9 trillion.
Okay, so their decimal points give an air of spurious accuracy to the forecasts – but the general point is clear. Whether Europe likes it or not, the vast majority of world trade will take place outside the EU.
The second key point to note is that Europe has hardly been a major economic success story. The narrative peddled by Remainers seems stuck in the past.
If we travel back in time to, say, 1970, it becomes easy to believe that the European economies are so dynamic that it is essential for us to have the closest possible links with them.
In the 1950s and 1960s, annual real GDP growth in the economies which then made up the EU averaged over seven per cent. In contrast, the UK barely scraped above three per cent.
Since then, the long-term average growth rate of the original EU countries has fallen more or less continuously to less than two per cent a year.
The UK’s has also dropped, but not by much. Over the past 20 years, our GDP has risen by 2.1 per cent a year. France registers 1.6 per cent, Germany 1.5 per cent, and Italy a mere 0.6 per cent.
Regardless of the eventual Brexit terms, successful economies in the future will simply have to engage with the rest of the world, rather than depend upon the EU.
As published in City AM Wednesday 10th October 2018
Image: Chinese Girls by David Stanley licensed under CC-BY_2.0
No one can tell them quite like Mark Carney, the governor of the Bank of England.
He appears to have briefed the cabinet last week that house prices could fall by 35 per cent in the event of a no-deal Brexit.
To be fair, the Bank did try to qualify this figure by saying that it was just the worst of several scenarios which analysts had produced in order to stress test the balance sheets of the commercial banks.
But the 35 per cent house price drop has now become embedded in the public narrative about Brexit.
Just how likely is such a massive drop to take place?
We do not know exactly how the Bank did its stress tests. But, typically, the worst-case scenario in such tests is either one which is judged to have a one in 20 chance of happening, or, if you are setting really demanding standards for the test, just a one in 100 chance.
When trying to assess these odds, an important input is what has happened in the past. The past may of course not be a reliable guide to the future, but it is all we have to go on.
An analogy from the sporting world might help. Every year, three clubs from the Championship are promoted to the Premier League. What are the chances of one of them being relegated after their first season in the top league?
We can look at the historical record since the Premier League began in 1992/93, which helps us form an initial view. We might then qualify it, and set the benchmark – a 44 per cent chance of relegation, since you ask.
With house prices, we can go much further back in time, as far back as 1845 to be exact. And the source of this information on nearly two centuries of house prices data is none other than the Bank of England itself.
Over all this time, there has never been a cumulative fall in the Bank’s house price series of as much as 35 per cent.
The closest we have seen was in the opening decade of the twentieth century in the run-up to the First World War. The UK economy was pretty much in the doldrums, and between 1902 and 1909, prices fell by a total of 33 per cent.
Nothing else remotely compares to this drop.
There have been two global financial crises over this period. In the 1930s, house prices fell by only seven per cent between 1929 and 1934.
And following the most recent crash, the reduction between 2007 and 2009 was 13 per cent.
In America, the Case Shiller house price index was 21 per cent lower in 2011 than it was in 2006, but this is the largest fall in that particular database.
The governor is therefore inviting us to believe that, in the event of a no-deal Brexit, house prices may fall by more than they have ever fallen since the Bank’s own data began in 1845.
How did the Bank arrive at this figure? I think we should be told.