Ward thinks the biggest threats to UK stability lie overseas
Tony Ward is chief executive of Clayton Euro Risk
We’ve heard it from the horse’s mouth: Brexit no longer poses the biggest domestic financial stability risk to the UK. That’s the assessment of the Bank of England’s Governor Mark Carney.
Asked by Treasury Select Committee chairman Andrew Tyrie if the vote to leave the EU still posed the biggest domestic threat to the UK, Mr Carney answered: “Strictly speaking the view of the committee is 'No'. In the run up to the referendum, we felt it was the largest risk because there were a series of positions and possibilities in the financial sector, things that could have happened that would have had financial stability consequences.”
Mr Carney said action by the Bank to cut interest rates and free up £150bn in lending had helped mitigate the vote’s impact. This week he went so far as to say that the economy's resilience would prompt the Bank to upgrade UK growth forecasts.
Oh how far we have come from the heady scaremongering days post-June 23 when many economists warned that both the economy and house prices would nose-dive – so to speak.
I like Mr Carney’s confidence, although I’m not convinced we are home and dry yet. As I stated in last week’s blog, I fear that rising inflation coupled with listless wage growth will hit customer spending this year. In addition, I think there is a danger that consumer confidence will wobble when Article 50 is invoked.
So, if Brexit is not the primary risk to UK financial stability, what is? At home Mr Carney et al are concerned by consumer credit growth. Yes, tick that, and it is right that policy makers continue to monitor unsecured credit growth. But that’s not the real risk. No, I think the real threat lies overseas.
This week, the World Bank predicted only a moderate pick-up in global economic growth in 2017. The bank’s Global Economic Prospects report forecasts 2.7% growth compared with 2.3% last year. Quite a drop then. Of particular significance for the global economy, the report notes, is Donald Trump's victory in the US presidential election. The report includes an analysis of why the US matters so much to the rest of the world in terms of extensive trade and financial links. It notes that there is a great deal of uncertainty about just what policies Mr Trump's administration will pursue. And it says there is the potential for stronger US growth if Mr Trump implements proposals to cut personal and business taxes and stimulates infrastructure investment. The report also looks at the possible impact of more barriers to international trade. This is not solely about Mr Trump, though he has said he would increase some tariffs on imports and has suggested some existing trade agreements could be scrapped. The bank says that globally, new trade restrictions reached a post-financial crisis high last year, and warns that emerging and developing economies would be most affected by more barriers.
Concerns about China are also heightening. Exports from the world’s largest trading nation have fallen for the second year in a row. Trade exports for last year dropped 7.7% year-on-year, the country’s General Admission of Customs reported. Export figures for December showed a fall of 6.1%, sharper than had been expected. Analysts polled by Reuters had predicted a fall of 3.5%.
With global growth slowing and uncertainty about how Mr Trump will deal with China, few analysts are expecting its trade figures to pick up this year. Julian-Evans Pritchard, China economist with Capital Economics said: “It’s hard to see what could drive a more substantial recovery in Chinese trade. Further upside to economic activity, both in China and abroad, is probably limited given declines in trend growth. Instead, the risks to trade lie to the downside: the likelihood of a damaging trade spat between China and the US has risen in recent weeks following Trump’s appointment of hardliners to lead US trade policy.” Analysts at ANZ research were similarly gloomy about China’s trade prospects this year. They said: “Our worry is that US President Donald Trump’s stance towards China’s trade could bring about long-term structural weakness in China’s exports. Trump’s trade policy will likely motivate US businesses to move their manufacturing facilities away from China, although the latter’s efforts in promoting high-end manufacturing may offset part of the loss.” China’s trade surplus with the US was $366bn in 2015, according to US customs data, which Mr Trump could use to press for concessions from Beijing, economists at Bank of America Merrill Lynch said in a recent research note.
Ratings agency Fitch has warned that rising debt levels and weak growth would lead to a ‘heavy flow’ of credit rating downgrades this year, adding that a trade war triggered by the US President-elect presented one of the biggest risks to the global economy.
All this is not to be taken lightly. Let’s hope that we are wrong about the extent of protectionist policies and trade disputes. Too much of this could threaten and destabilise world growth. And that’s a real threat to financial stability.
