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

Voting history

Brexit and financial market volatility

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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.

Autumn Statement & Charter for Budgetary Responsibility

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Question 1: The Chancellor forecasts a cyclically adjusted fiscal surplus by 2017-18 and in cash terms by 2019-20. Do you agree that this planned path of fiscal consolidation is appropriate?

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Answer:
Disagree
Confidence level:
Confident
Comment:
I don’t think the planned (quite aggressive) spending cuts are necessarily needed at this point and so falling short of the planned cuts would be desirable. If the fiscal surplus is to be achieved, I hope it is because a continued recovery allows revenue collection to meet or surpass its target. Of course, I think there are many downside risks at the moment which would manifest themselves as weaker UK economic growth. My fiscal concern in case these are realised is that the government sticks to, and even increases, the size of the spending cuts in an effort to meet surplus targets.

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Question 2: Do you agree that the Charter for Budgetary Responsibility is helpful in underpinning the credibility of fiscal policy?

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Answer:
Disagree
Confidence level:
Very confident
Comment:
There are two main objections that I have. First, I do not like the focus on a surplus in terms of the fiscal balance. What matters is the sustainability of debt and this should be measured as a percentage of GDP. A surplus on the fiscal balance does not guarantee any sort of fiscal sustainability. Sustainability depends, among other things, on the rate of interest relative to the level of economic growth. A deficit could comfortably be sustained (and even lead to declining debt to GDP) if growth and interest rates are favourable. But equally, a surplus on the deficit does not guarantee sustainable or falling debt as a percentage of GDP. The second objection is the treatment of investment. It is clear that some forms of public investment are necessary for continued UK growth but such spending typically takes longer to bear fruit. As such, by treating it equally to other types of government expenditure, I fear it will be public investment that suffers the most by governments trying to achieve this charter targets.

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