WEEKLY COMMENT 3-11-2016
By Barry Edwards
BofE Inflation Report
The Bank of England (BofE) has published its quarterly inflation report which is less pessimistic in the short term than the earlier August report. The strength of the economy since the referendum has surprised most forecasters although the ultimate longer term view is that growth will recede once the UK actually leaves the EU. Inflation is expected to rise and reach 2.8% in 2019 according to the BofE but other forecasters predict that it will reach 4% mainly due to the fall in sterling since the vote.
If you click on the link below you can read the BofE report, it is 48 pages;
Below are the relevant extracts from the summary in the report;
“-indicators of activity and business sentiment have recovered from their lows immediately following the referendum and the preliminary estimate of GDP growth in Q3 was above expectations. These data suggest that the near-term outlook for activity is stronger than expected three months ago. Household spending appears to have grown at a somewhat faster pace than projected in August, and the housing market has been more resilient than expected. By contrast, investment intentions have continued to soften and the commercial property market has been subdued.”
“Output growth is expected to be stronger in the near term but weaker than previously anticipated in the latter part of the forecast period. In part that reflects the impact of lower real income growth on household spending. It also reflects uncertainty over future trading arrangements, and the risk that UK-based firms’ access to EU markets could be materially reduced, which could restrain business activity and supply growth over a protracted period. The unemployment rate is projected to rise to around 5½% by the middle of 2018 and to stay at around that level throughout 2019.”
“Largely as a result of the depreciation of sterling, CPI inflation is expected to be higher throughout the three-year forecast period than in the Committee’s August projections. In the central projection, inflation rises from its current level of 1% to around 2¾% in 2018, before falling back gradually over 2019 to reach 2½% in three years’ time. Inflation is judged likely to return to close to the target over the following year.”
The high court has caused real disruption to the government’s plan to activate article 50 by ruling in favour of Gina Miller and her team. In effect, it has opened up the possibilities for a very different exit from the implied ‘hard Brexit’ that the comments made by ministers suggest. It also makes the BofE inflation report almost out of date as soon as it was published because a softer Brexit would restore some of the value of Sterling. Currently the value is 1.25 to the US dollar and it may rise further if traders believe that the government will lose the appeal. This is not a good time to make forecasts with all the events changing the parameters.
The only example we have of a country leaving the European project is Greenland when it was still the EEC. In 1973 Greenland joined the European Economic Community with Denmark together with the UK and Ireland. In a referendum in 1982, a majority of the population voted for Greenland to withdraw from the EEC which was instigated in 1985. Currently the country has autonomous rule but is still allied to Denmark for foreign affairs and defence. It was some time ago and before the Maastricht treaty which formed the EU and therefore not really a format for negotiation.
The only similarity between the UK and Greenland is that the process was started by a referendum but beyond that the circumstances are very different. Having such a small population, Greenland was basically given what they wanted and there is still a close association with the EU. Nobody is sure what the UK wants and with the legal framework potentially changing dramatically it is still very uncertain. The legal debate will get interesting and keep the speculation about where the power lies to make the decisions in the headlines until the Supreme Court makes its ruling.
My guess is that the government will lose since the weight of legal history making parliament the only body to change laws is so extensive and based on the 1688 bill of rights. This act made parliament the only authority to rule in these situations especially since it is such an important event in the history of the UK. The lawyers are going to have a great time discussing this point and we should all learn a lot about who really has the power to rule in this country.
Brexit is going to get even more complicated and could turn out to be something none of us expected when the final outcome is decided. This may mean we do not officially leave the EU but become associated with conditions with some kind of restrictions on immigration. That aspect may be decided by the negotiations being conducted by the EU and the Switzerland which we discussed a few weeks ago. There are a lot of twists and turns to come before the path becomes clearer and many years may pass in the meantime.
That’s all for this week, more observations next week.