Ray Barrell's picture
Affiliation: 
Brunel University London
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:
Agree
Confidence level:
Very confident
Comment:
The possibility of exit will change daily until the vote takes place. This alone will raise volatility and uncertainty in the economy as a whole as well as in all financial markets. Exit itself will give rise to new policies, with potential major revisions to UK trade and investment regulation, as well as to financial market constraints. This possibility raises uncertainty now. Exit will almost certainly reduce sustainable output, as the gains from greater competition are unlikely to be available whatever new arrangements can be put in place. Potential competition and market contestability will be reduced if we exit. The uncertainty about the post exit environment and the impact of exit itself on the economy will be reducing investment and foreign direct investment now, whatever the outcome. Both investment and foreign direct investment will be reduced if exit takes place. Comparisons to the Danish situation in 1992 are designed to assuage fears, but the comparison is false. The Danes refused a Treaty, which would then have failed if it had not been amended. They remained a member of the Union. If the UK votes to leave the Union, negotiations to keep them in will be politically impossible.

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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:
Very confident
Comment:
Exchange rate volatility is likely to increase further in the next four months as the membership vote approaches. Exit will probably be associated with lower capital inflows and a lower real (and nominal) exchange rate. As the probability of exit changes, so will the exchange rate. Exit may also result in greater exchange rate volatility being sustained for some time as policy reactions will be harder to judge. We are in for a bumpy few months, and perhaps a rocky few years, with higher short term exchange rate volatility. Exchange rate volatility damages foreign direct investment inflows, and this will cause short to medium term damage to the economy.

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:
Strongly Disagree
Confidence level:
Very confident
Comment:
The positive impact of low oil prices on the UK economy in 2015-16 should more than offset the negative impacts of lower equity markets and the slowdown in emerging markets. Lower oil prices have a clear and immediate positive impact on demand in the UK. Equity markets declines have a limited short term impact on demand as consumers take time to react to them, and firms do little investment through stock market issues. The weakening of sterling in recent weeks should more than offset any negative impact from emerging markets on trade, and these would be limited in any case. The UK is not a significant exporter to China and other emerging markets, unlike Germany and the US. Risks always exist, and threats to the solvency of UK based banks involved in Emerging Markets and China would pose a problem. However, those banks seem well capitalised, and this problem should not be part of a central scenario. The UK government, in any case, has significant space (and creditability) for a temporary fiscal response to any noticeable reduction in demand driven by banking sector problems.

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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:
Strongly Disagree
Confidence level:
Very confident
Comment:
Prospects for global growth have not deteriorated noticeably in the last six months. The slowdown in growth in China is likely to have a limited impact on demand in OECD countries. Low oil prices stimulate spending on other goods and boost demand in oil consuming countries. The prospect for sustained low oil prices appears to have led to a reduction in equity holdings by some oil related sovereign wealth funds. The sovereign wealth fund selloff appears to have been a factor behind stock market turbulence. Equity market declines only have a significant impact on demand when they spill over in to the solvency of financial institutions. This does not appear to be a significant problem in OECD countries. The Chinese banking system may face problems after the bursting of the stock market bubble, but this is unlikely to cause major problems for OECD economies. The OECD economies are more insulated from Chinese financial markets than they are from Chinese trade. Even if growth slows there remains significant space for a temporary fiscal expansion in in most OECD countries.

China’s growth slowdown: likely persistence and effects

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Question 2:

Do you agree that if the Chinese slowdown turns out to be persistent, it will have a significant impact on UK growth (say, in the order of a few tenths of a percentage point) and/or it will justify a material change in monetary policy (for example, in terms of the timing and speed of a return to ‘normal’ interest rates) and fiscal policy (for example, in terms of the timing and speed of fiscal contraction).

Answer:
Agree
Confidence level:
Confident
Comment:
A persistent slowdown reduces trend growth, and the impacts will be very small. Two percent off trend Chinese growth would reduce UK trend growth by at most 0.1 per cent. However, the risks the Bank refer to are cyclical, not structural. If the cycle downturn is strong this will slow UK growth. The magnitude might be twice as high for the demand cycle as for the supply trend effect

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