Actual economic effects cont...

[ManonLescaut]

Telegraph: Britain could be up to 70 billion worse off if it leaves the single market IFS warns

The respected economic think tank said that Britain could enjoy an extra 4 per cent in national income if it remains in the single market, equivalent to two years worth of growth.

The report claims that while leaving the EU will free the UK from an estimated £8 billion a year of budget contributions, the loss of trade from Brexit could hit tax receipts by a larger amount.

It found new trade deals would be unlikely to make up for lost EU trade, which accounts for 44 per cent of British exports and 39 per cent of service exports.

Telegraph: Treasury looks at quitting the single market

Officials say the talks have revealed a willingness among some top figures to scrap passporting despite early calls to stay in the single market from some quarters...

Mr Boleat cast doubt over the UK’s ability to secure a Norway-style deal to remain in the single market. He said accepting free movement of people and paying large sums to Brussels while accepting its rules would not be politically acceptable.

The BBA wants the UK to leave the single market but retain unimpeded access to EU markets.

I've seen mentioned in a few places that the rise in gilt yields are something to be concerned/interested in.

Can anyone explain?

My guess would be - yields up = price down = more expensive for the government to borrow = less faith in the country? But I am not an economist and often get things arse about face.

But how is this likely to affect the economy in the short term? Or is it just more evidence of lack of faith of the markets in the UK?

"But Burberry shares fell 6.5%, despite the fashion house reporting a big rise in UK retail sales as tourists headed to its stores in London to take advantage of the weaker pound.

The company said underlying UK sales had jumped 30%."

So this is the sort of things that will be booming with devaluation.

On the other hand, CPI inflation rises to 1% from 0.6% this morning and RPI to 2%.

BoE will continue to ignore inflation while their pension fund sits on indexed link gilts.

The 10 years gilts was around 1.5% before the referendum and fell to a low of 0.6% and now is back up to 1.2%. So it is cheaper to borrow than before June this year. The movement is likely to do with BoE policy of allowing higher inflation than lost of 'confidence'.

"this is the sort of things that will be booming with devaluation."

Except that product exports don't make up a significant part of UK economy.

Service exports sort of do, but those are mainly financial and their future depends on whether UK can extend passporting privileges and May's recent speeches à la "We don't want EU common market privileges if that means we'll have to allow EU nationals to come to the UK as they please " don't make that look terribly likely.

"On the other hand, CPI inflation rises to 1% from 0.6% this morning and RPI to 2%. BoE will continue to ignore inflation while their pension fund sits on indexed link gilts."

2% inflation isn't something to worry about. That would be why they are ignoring it, not anything to do with pension funds which are not even the 100th item of consideration in BoE's list of 'What should we worry about re inflation?'.

2% CPI (not even RPI) happens to be BoE's target and is considered "price stability".

"I've seen mentioned in a few places that the rise in gilt yields are something to be concerned/interested in. Can anyone explain?"

Yields are up because risk premiums are up - i.e. UK sovereign bonds are now considered a more risky investment than before. That is not just because of risk of default, but because GBP is sliding like a legless drunk and it is normal to ask for more return to lock your money into GBP instruments.

This is worrying because it shows the lack of confidence in UK economy, its government's ability to steer it through the Brexit crisis, and its currency. Not just that, higher Gilt yields (and higher interest rates in general) mean that:
(1) It will be more expensive for UK to borrow in the future
(2) There will be less investments going forward, as credit becomes more expensive.
(3) There will be less consumption going forward, again, as credit becomes more expensive.

... which you don't want during a time of economic slowdown. You want the opposite: For people to invest and consume, so that economy can grow.

One way to boost the economy would be printing money (i.e. "quantitative easing") but that would mean even lower GBP and higher inflation. And increasing inflation during a time of stagnation is a terrible thing called Stagflation which we were warned about in Econ class. Nobody wants to go there.

It is not an easy situation. One might call it a disaster which UK managed to deliberately get itself into.

So risk premium were even higher pre 23rd of June as yields were higher? And then risk premium crashed after the vote? Would you like to check your logic there?

Lots of things happened last week including events at Boj anf Fed. It isnt just UK yields that went up but our Brexit skeptic media did not report those in the same article as UK yields went up.

And do how much goods UK export? And how much services? How does that compare to the mythical export powehouse Japan?

"boost the economy"

Really the way if boosting economy is for people to work hard, build business and make things. QE transfers wealth from assetless to asset rich and does little in increasing overall welfare.

Stagflation is where we are heading.
HSBC got its forecast right back in June.

www.bloomberg.com/news/articles/2016-06-24/hsbc-prepare-for-stagflation-in-the-u-k

I just saw the IFS on the impacts of inflation and the benefits freeze... twitter.com/TheIFS/status/788334228220080129?lang=en

Really disturbing

Really the way if boosting economy is for people to work hard, build business and make things. QE transfers wealth from assetless to asset rich and does little in increasing overall welfare.

Heartily agree!

However making the business environment more difficult by reducing available markets is not the way to do that is it? Also by reducing competitive advantage.

QE was, and remains the point of last resort when other monetary policy fails to work.

But it also opens up new opportunities assuming the opportunities are not blown. The new found extra freedom could be put to good use.
The problem with Fox is one of execution rather than strategy.

Except QE round 1, it was a mechanism to subvert the normal process of the market and protect asset prices which the Central Banks thought (wrongly) would serve a good social purpose (in their social circle I suppose). It probably contributed to a few Brexit votes too.

The chance of developing new opportunities to replace the lost EU trade is small. 69 percent of our trade is through the EU or EU deals. 15 percent is with the US.. he rest of the world makes up 25 percent, so we have jeopardised our largest and most established tradingredients partners for he possibility of getting better deals from far smaller.

Liklihood is very small

Hmm. I wonder what new markets the (increasingly impoverished) eurozone is going to find to trade with, once the UK is out? We ought to send Liam Fox to speak to them too. Until Remainers accept that things are changing they will continue to base their information on models that will soon be irrelevant.

Well they'll have he comfort of all the deals they already have. Wheread as we will have none and a far reduced negotiating hand having just voluntarily given up one of the factors that giveshe us competitive advantage..

The EU will still be an attractive proposition for many other blocs and countries to do deals with.

Except for the ones they had with us......

The EU won't be attractive if the euro goes tits up

If the euro goes tits up the crash will wipe everyone out..

They still have the upper hand in negotiations with us too. Bigger market.

Assuming UK want to negotiate, SF. Who knows?

Thanks cote and topsy for answers to my question.

topsy to answer what you are saying about gilt yields going down after the vote - as I understand it this is a normal thing to happen after a sudden currency devaluation. i.e. your currency is now worth less, so I am willing to lend you some of it at a lower rate (yield) than before, that's what you would expect.

So, the reasons some economists are worried is that currency devaluing and bond yields going UP at the same time is unusual and more worrying as even though your currency is cheaper now, the market still isn't willing to lend to you at a lower rate. I can't see how this doesn't show a lack of confidence?

But I am not an economist. I wish I was :-) Somehow I think trying to understand economics through the current situation may be a bit of a baptism of fire as we seem to be in fairly unchartered territory.

The EU won't be attractive if the euro goes tits up

Brexiters reduced to hoping the Euro collapses. Oh dear.

What do you mean bored? Are you suggesting that the UK may just want to tell the EU to sod off and not negotiate anything with them? Erm, OK then....

Brexiters were applauding Tesco last week during the unilever battle, wonder how they feel about this?

www.theguardian.com/business/2016/oct/18/tesco-boss-food-price-inflation-lethal-struggling-millions-matt-davies

SummerL

What they normally observe is that a developed country yields go down when currency goes down while a developing country yields go up when currency go down.

So today the GBP is up and the yield is down and economist must be over the moon.

For what you quoted the economist's theory to be logical, they would only lend money when currency falls with the expectation that the currency will go back to its 'normal value' - so lend it cheap at low yield and then get back a higher value currency. So on the June 24th, the market clearly have plenty of confidence?

I do not think one should read too much into this and should look at this in perspective. The yield has gone from 0.6% to 1.3% peak and now back down to 1.1% with no concrete actionable news. There is this 'parliament will get to vote on the deal' thing but that is pretty meaningless as the 'deal' to be voted is still not yet known. Once A50 is triggered, it doesn't matter whether the parliament approved a hard brexit or not as if they do not approve a hard brexit deal, it is still a hard brexit. If it is a SM Access deal, then the parliament will approve it. So there is no new information there at all.

The market is now a lot less liquid due to constant Central Bank interventions and QE (which took a lot of bonds out of circulation). This is exasperated by all the computer trading.

The ability of the UK government to pay back the money by borrowing new money (at worse, from BoE through an intermediary such as RBS) to pay back old gilt has not changed and will unlikely to ever change as with are not in the Eurozone.

GFG

I feel that we should take Guardian pieces with a pinch of salt.

Having read the full statement not at Guardian with an agenda obviously), basically Tesco UK CEO Matt Davies) said that yes, food inflation is bad, but WE will bring you low prices.