Michael McMahon's picture
Affiliation: 
University of Oxford
Credentials: 
Professor of Economics

Voting history

National Living Wage and the UK economy

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Question 1: Do you agree that the new National Living Wage is likely to lead to significantly lower employment?

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Answer:
Disagree
Confidence level:
Confident
Comment:
The total number of employees earning the minimum wage is a relatively small proportion of total employment (around 5% according to the Low Pay Commission, but possibly lower using other estimates.) Moreover, firms can use price adjustments especially where the low paid jobs are complements to other workers earning more and not affected by the minimum wage change.

Brexit and financial market volatility

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Question 2: Do you agree that the possibility of Brexit significantly increases uncertainty and volatility in financial markets and the economy in general?

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Answer:
Agree
Confidence level:
Very confident
Comment:
While Sterling seems to be the main variable reacting to the uncertainty about the likelihood and costs of Brexit, I expect that other financial variables will react too in the coming months as information is revealed. The holding of a referendum has been known for some time. However the uncertainty has been crystallised by the announcement of the precise date of the event, together with the revelation of what concessions the EU has offered for continued UK membership of the EU (and the ensuing picking of sides by prominent politicians). While they won last year's election with a majority, the Brexit question threatens to tear the Conservative party apart adding heightened political uncertainty to (rising) economic and financial uncertainty. It will be interesting to see how business and consumer confidence surveys react in the months leading up to the referendum to see how much of this volatility affects real activity.

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Question 1: The value of the pound fell sharply this week. Do you agree that the public debate on Brexit can be expected to (continue to) lead to a substantially higher level of exchange rate volatility in the upcoming months?

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Answer:
Agree
Confidence level:
Confident
Comment:
There are 120 or so days until the June Referendum on Brexit. The costs of Brexit on growth and Sterling are highly uncertainty as it is, but they could be large. Given that the outcome of referendum is extremely close and difficult to call, any relevant new information in the coming months (such as new polls and changing public opinion) will see markets updating their beliefs regularly. Sterling seems to be the main variable reacting to the uncertainty meaning volatile beliefs will lead to volatile exchange rates. Of course, if polls start to indicate a clearer outcome, particularly for staying in, the volatility would subside. But I don't see such being clarity as likely.

Market Turbulence and Growth Prospects

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Question 2: Do you agree that the falls in share prices, low oil prices and the slowdown in some emerging market economies will have a significant negative impact on the UK’s economic recovery?

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Answer:
Disagree
Confidence level:
Confident
Comment:
As with the global economy, I see the main risks to the financial stability and think these remain muted (and as the Bank of England has said the banking sector can absorb related losses at the moment). The effect of lower oil prices should provide a reasonable boost to spending power in the coming quarters. In terms of more medium and longer term effects, the low oil price does reduce incentives for companies to implement green policies and transition to less reliance on oil which is a negative of low oil prices.

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Question 1: Do you agree that economic growth prospects for the global economy have seriously deteriorated?

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Answer:
Disagree
Confidence level:
Confident
Comment:
Even before the market volatility of January, it was clear that (i) the global economic recovery is fragile and remains uncertain, and (ii) China is clearly going through a difficult period of economic transition. I believe that the most recent developments confirm this but do not necessarily suggest a “serious” further deterioration. The developments seem to all be interrelated. The slowdown in China and the transition to more balanced growth affects demand for commodities in particular because it means less investment and less manufacturing growth. The largest stocks on the SSE are mostly financial or manufacturing (incl petrochemical) companies. The transition and uncertainty therefore likely has a disproportionate effect on Chinese listed securities. Given its importance in the global economy, this creates uncertainty further a field and hence volatility in those markets. The most recent developments may reduce growth prospects somewhat. But the primary impact is to add to the downside risks to financial stability through direct credit exposures, second-round effects through macro-financial linkages, liquidity impacts, and currency-related risks. However, I believe these primarily remain risks rather part of the central case for now.

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