Emma Wall: Hello and welcome to the Morningstar Series "Market Reaction". I'm Emma Wall and I'm joined today by Keith Wade, Chief Economist at the Schroders to discuss the U.K. economy.
Hello Keith.
Keith Wade: Hi.
Wall: So, we've heard this morning that Mark Carney has decided to stay on as Bank of England Governor until June 2019 which is expected to be sort of three months after Brexit actually happens. With this continuity at the head of the Bank of England, what does it mean for monetary policy going forward?
Wade: Well, first of all I think it's good news, because Mark Carney is actually one of the constants that we have in the U.K. at the moment, of course we have got a new government. He will provide that continuity, but I think also he said he sees this as quite a challenging time for the U.K. because of course we don’t know exactly what Brexit deal is going to be.
A lot of people have criticised Mark Carney for being too gloomy about the economy. But I certainly think that there are lot of challenges ahead and actually some of the problems which are being created by Brexit are still to come. So, it’s good to know that there is somebody there who's got quite a bit of experience and is prepared to put stimulus in to the economy when it's needed.
Wall: And one of the things which has led him to make the decision is that indeed the Monetary Policy Committee as a whole, so far since Brexit is the rapid devaluation of sterling. What do you expect from the currency in the future and how will this impact will we have more QE because of it?
Wade: Well, sterling has fallen a long way, and of course in many ways that’s loosen monetary conditions for the Bank of England and in some ways is doing Mark Carney's job for him which of course has created a base about how much more does he need to do. Very difficult to know how far its going to go because of course currencies have a tendency a bit of overshooting and falling very, very sharply and then stabilising.
It is true that the pound where it is today is pretty competitive by pound standards. But you could argue that we need a competitive pound because we have a big current account deficit and we need to sort of rebalance the economy more towards overseas growth and to get that deficit under control. So, in some ways you could say yeah, it's fallen a long way. People say oh, yes, it could fall a lot further, but I wouldn’t be surprised if we saw a period of stability now and we began to see some sort of improvement maybe in the traded good sector.
Looking further out it's difficult to know because unless we get an improvement in the current account then the pound will always be vulnerable to further falls because we do rely on what Mark Carney's called the kindness of strangers. Overseas investors willing to buy the pound in order to keep it where it is.
Wall: Of course all the controversy surrounding Mark Carney is because of the comments he made before we want to the polls. And that was that Brexit would be catastrophic for the U.K. economy. The latest GDP figures last week showed that in the three months following the Brexit vote actually the economy expanded by 0.5% instead of what was expected the contraction of 0.1%. Can we expect this to continue or is that maybe too positive a view?
Wade: I think it's probably too positive. I mean it's certainly true the economy has performed better than expected undoubtedly. I mean Mark Carney would say that some of that is because of the action that he took to try and offset the negative effects. But I think when we think back to before Brexit and look at the analysis that was done then.
The focus wasn’t really so much on the consumer being affected. It was much more on business and capital spending and from what we can understand is that there has been a bit of slowdown in CapEx and we think that could well continue because businesses is very uncertain about exactly what Brexit will mean for them going forward.
It's not clear what trading arrangements we are going to have with our biggest partners in Europe. It is not clear what the relationships would be between countries that have cross border operations and so on. It's not clear what the regulation is going to be so everything has kind of gone on to hold at the moment and of course that means that CapEx would just be very flat and will be weaker. We don’t have a lot of data on CapEx. So we don’t really quite know the full story.
The consumer side, the consumer will be affected but not really until later in the year and of course what we do know is happening is that inflation is rising as a result of the falling of the pound which was one of the things that we did expect to happen.
So I think we're in a bit of phony war at the moment. I mean people are drawing inferences and saying it has had much effect but that full effect has not really been realized and we will see weaker business investment. We will see weaker consumer spending over the next 12 months as the full Brexit effect comes through.
Wall: Keith, thank you very much.
Wade: Thank you.
Wall: This is Emma Wall from Morningstar. Thank you for watching.
