Lessons from Brexit and the ‘mini’ Budget

“Maybe we got 'em demoralised…” (Private Hudson, Aliens)

In horror films, the third act often opens with one of the remaining disposables sounding a tentative all-clear, seconds before meeting a messy end. Could investors celebrating this week’s more conciliatory Oval Office tone soon know how this feels? This week, we look at the latest developments and assess the increasingly popular comparisons to the UK’s seismic shocks of the last 15 years.

Stagnation and anti-system politics

The idea that regions struggling to grow suffer compounding populist spasms over time is supported by both intuition and evidence¹. The longer the stagnation, the more likely many in the electorate will fall into the arms of anti-system politics. There are exceptions to this tendency of course. President Trump’s support base takes in far more than the victims of regional economic rust. The same is true of rising support for the extreme ends of the political spectrum in Europe and elsewhere.

However, as a framework for understanding the appeal of the contemporary crop of populists and demagogues, this gets us at least some of the way. Muscular and disruptive action of one sort or another is usually the proffered remedy. Such decisive vigour throws the apparent inaction of a bloodless and technocratic elite into neat relief. Their offer, constrained by a spaghetti of unintelligible trade-offs, can be easily caricatured as scraps swept from a top-table feast dominated by the globalists.

The ‘experts’ respond by adding too much force to their arguments, well beyond what they can credibly support – see ‘Project Fear’ and Brexit. With the barbarians at the gate, arguments and forecasts are shorn of nuance and the extremes are emphasised for fear they will be overrun. The extremes then reinforce each other, leading to ever wilder claims on both sides of the ‘debate’.

Globalisation

Globalisation’s frequently high-handed advocates have a case to answer on this latter point². Poor-quality data has been co-opted to produce worse facts in the service of a word that has become so broad, it is now all but meaningless. Dizzyingly sophisticated statistical models and analyses have provided the intellectual equivalent of siege technology, pounding the naysayers into weary submission.

Social media and the gathering craving for strident opinion over nuanced arguments is clearly part of the story here. In such a world, how can you persuade people of the need to give up precious, near-tangible sovereignty in exchange for the very diffuse gain of slightly lower interest rates or the possibility of higher (long-term) growth without hardening possibles into probables?

We need to recognise that those modern econometric trebuchets, brought in to serve exactly this purpose, may be good at finding acute effects but will of course be nearly blind to the chronic. This is even without acknowledging that the data sets we lean ever harder on to support our agendas miss large and important parts of the growth process and likely always will. We can’t even guarantee that these data are missing the same bits to the same degree over time, further complicating interpretation.

Lessons from Brexit and the ‘mini’ Budget

We are all now in the process of trying to discern what these last few weeks mean for the US and the global economic outlook. There are clearly no perfect precedents to the moment – the world economy has never been organised as it is today. However, there are perhaps some interesting messages in amongst two of the shocks endured by the UK economy these last few years.

On the morning after the UK electorate’s vote to leave the European Union, we suggested that the impact on the UK economy would be ‘unhelpful, but ultimately digestible’. There have since been multiple efforts to quantify the accumulating hit to the UK economy, some³ more credible than others. Counterfactual ‘doppelgänger’ UK economies were statistically constructed with the aim of demonstrating the idiocy of leaving the Union.

The likely reality is significantly more nuanced than such analyses would suggest. At best we can say that the UK has probably enjoyed a little less growth and possibly a bit more inflation than a UK that voted remain back in 2016. Precious time and energy has been surely wasted where it could have been more profitably spent. Administrative and other burdens have weighed on small business in particular and the uncertainty bonanza has surely deterred investment. Even so, the effects have materially undershot the overemphasised doomsday forecasts.

The lesson from the brief premiership of Liz Truss is significantly easier to describe – markets can provide a helpful disciplinary force where other checks and balances fail. There are many theories as to why President Trump already appears to be stepping back from the precipice, but the most plausible is that markets were beginning to become disorderly in a way that threatened serious long-term damage to the US.

The game of trade ‘chicken’ requires the protagonists to seem like they don’t care to force the other to blink. However, there are clearly limits and stock and, particularly, bond markets seem to be helping to highlight exactly where those are for this unusual US administration.

Investment conclusion

Columns and feeds bulge with particularly dramatic predictions right now. From the end of the US era to various other geopolitical cataclysms, the dramatic seems ever more plausible at times like this. Everything is of course possible always. However, these are times when we need to be particularly careful with how we handicap the various potential strands of the future.

Will this US populist insurgency spell the end of globalisation (however defined), free trade and the US century? Or could it spark an antagonist rejuvenation of all those trends? After all, free trade has overnight gained some interesting disciples in reaction against President Trump’s assault on it. Here too the statistics require careful interpretation. Goods trade as a percentage of global GDP (Figure 1) will become an ever less meaningful statistic as the world grows unevenly wealthier (and therefore service sector oriented).

Figure 1: World goods trade peaked back in 2008

Source: Datastream, Barclays

Meanwhile, as Robert Wright observed at the turn of the millennium, there are likely still powerful, albeit more glacial, forces pushing the world towards more integration over time⁴. Perhaps this is just the fractious beginning of a global conversation facilitated/agitated by social media and the internet that soon cools. We might even see emojis as the beginning of an increasingly sophisticated global language, breaking down barriers erected by nativist politics. Keep an open mind.