Integrated challenges

As Mark Carney noted in a recent speech at the Jackson Hole Symposium, in the context of significant global headwinds, the UK economy hasn’t been doing so badly. Until the start of this year, buoyed by a strong labour market the UK has been growing at its trend rate. However, in the past few weeks the US-China trade war has escalated, creating significant movements in the US bond markets; whereas Germany (which recently issued a negative yielding, 30-year, zero coupon bond) now seems set for recession. So, where does the UK stand? Carney states that for the UK Brexit trumps these global headwinds in terms of potential impact. Particularly, in the wake of recent rhetoric around a no-deal Brexit (now 6/5 odds, vs 4/7), the UK now has ‘the highest FX implied volatility, the highest equity risk premium, and the lowest real yields of any advanced economy’. Whilst the medium-term economic impacts of a no-deal Brexit are still shrouded, in Carney’s view the likely monetary policy response would be to ease. However, in making this statement, he acknowledged the diminishing usefulness of monetary policy as tool to stabilise the economy, in a globalised environment where economies act in unison and where the US (and the dollar) remains dominant. If the US tightens when we want to ease, then the system becomes strained. In the long-term Carney’s solution to this rests in a shift to a truly multi-polar economy, perhaps using the Renminbi as a global reserve currency. In the shorter-term countries ‘must play the hand they are dealt’.