Patrick Minford's picture
Affiliation: 
Cardiff Business School
Credentials: 
Professor of economics

Voting history

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:
Strongly Disagree
Confidence level:
Very confident
Comment:
Here the question widens and I will just say this. There is a great difference between swings in the exchange rate or short term exchange rate volatility and damage to the economy. The economy's behaviour depends on fundamentals which will be greatly improved by Brexit. Short term falls in sterling will actually stimulate the economy in the short run; consequently share prices will likely move in the opposite direction. Neither volatility is damaging to the economy. Volatility is a fact of economic life; the job of economic stabilisers, such as interest rates and the exchange rate, is to ride out such short term shocks so as to prevent economic damage. The key policy aim must be to get the fundamentals that create growth as right as possible. To this end, and I am afraid contrary to much status quoist economist and civil service opinion, I have to say that Brexit is an important liberalising policy, similar to previous Thatcherist supply side reforms. Its aim is to remove the UK from the protectionist and corporatist regulative environment of the EU and place it firmly back into the world of global competition.

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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 is substantial failure to understand that Brexit is about long-run structural reform of the UK economy- leaving the EU will get rid of EU protectionism and regulative intervention from an essentially socially motivated viewpoint in UK economic affairs. It will alsoprotect the UK against further entanglements in the new 'euro architecture'. So in the short run rising Brexit probability will push sterling down. However as understanding of these structural issues increases with the ongoing leave campaign which will combine populism on sovereignty and immigration with sophistication on economics, sterling will recover and may in the end wind up stronger. This will probably make for volatility.

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:
Basically my answer follows the analysis in my first answer which relates to the world economy. But for the UK the strengthening world background (in spite of the difficulties of some emerging market countries, mainly primary producers) will be positive. Low material prices are positive for UK consumers and investors. Share prices will recover as these things work through. N Sea oil is of course negatively affected; but positive effects elsewhere in the economy are much stronger. The UK recovery should continue.

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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:
Very low commodity prices are a usual feature of the post-recession world economy. The last major example was in the 1980s and 1990s, when for example oil dropped below current real levels for more than a decade. This results from large overcapacity in materials production after rapid growth gives way to slump and initially slow recovery. Investment in material capacity is being sharply cut back. But investment in final production is growing and will get stronger. There is probably also a boost to world consumption since primary producing countries seem to cut back consumption less than consuming countries raise it. China is one element in this excess capacity and is eg pushing excess steel supplies onto world markets ad cutting back steel capacity. However it is aiming to boost consumption spending and this is already occurring with fast growth in retail sales and services consumption. World growth is running around the 3% mark, which is lower than the 5% or so in the mid 2000s but that growth then was unsustainable and seems to have been fed by rapid credit growth. Growth at current rates will not ignite another such boom unless monetary policy becomes highly stimulative. Currently monetary stimulus from QE and 'zero' interest rates is having its effect offset to a large extent by the post-crisis surge in bank regulation which has caused banks to shrink their balance sheets, particularly for 'riskier' loans to smaller businesses. Hence monetary stimulus is still fairly weak overall. It is likely that bank regulation will be eased and monetary stimulus increased- eg by the ECB; but the Bank of England is reluctant to tighten while the Fed has said rates will be raised very slowly. With final consumers and investors spending more anyway, growth is likely to strengthen.

Autumn Statement & Charter for Budgetary Responsibility

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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:
Agree
Confidence level:
Confident
Comment:
The institution of the OBR has been useful. As an independent watchdog it has brought some extra credibility to public finances. As for the Charter, its aim of a surplus in 'normal times' is laudable for now, while debt/GDP is above 80% and looks like being above 60% for the foreseeable future. The arithmetic for the decline in debt/GDP is that if nominal GDP is growing at say 4% (2% real growth plus 2% inflation) then at a balanced budget debt/GDP at 80% will fall by 3.2 percentage points per year. A small surplus effectively guarantees this rate of fall as a minimum; this rate falls to 2 points once debt reaches 50% of GDP. So to bring debt down to 50% of GDP from the current 80% roughly speaking requires a dozen years of balanced budgets. Allowing for the usual slippage on current targets, we are looking at getting debt/GDP down to 50% of GDP by around 2030. Hence it seems right to support the Chancellor's 'normal target' of a surplus for the foreseeable future. Once debt ratios come down to sustainable levels we can loosen it up to a 'normal deficit' of around 2% of GDP which would keep the debt/GDP ratio constant.

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