Britain’s political and economic landscape is now more uncertain than in has been in more than 20 years, and what happens next is anyone’s guess, according to the latest research from economists at Morgan Stanley.
In the bank’s weekly note on UK economics and strategy note, economists led by Jacob Nell point out that the crazy instability and uncertainty surrounding pretty much everything in the UK right now has led to economic policy being more uncertain than at any point in more than two decades.
With a change of Prime Minister to be imminently declared, no real indication of when negotiations about the UK’s exit from the EU will begin, and a general climate of uncertainty in the country, Morgan Stanley notes that no one is really clear about which way economic policy will go, causing uncertainty around the economy to surge.
One thing making economic policy uncertainty even greater is the fact that there will almost certainly be a new Chancellor of the Exchequer in the next couple of months. George Osborne — who was among the staunchest backers of the Remain campaign — will be highly unlikely to keep his position when a new Conservative PM, be it Theresa May, Michael Gove, Andrea Leadsom, Stephen Crabb, or Liam Fox.
Osborne has been chancellor for more than five years and steered the UK economy through the post-financial crisis recovery, although he has been criticised for failing to reduce the UK’s budget deficit as quickly as promised. Since the Brexit vote, Osborne has scrapped that policy, saying that the government needs to be “realistic” about deficit reduction in the post-Brexit world. On Monday, Osborne announced that he plans to cut UK corporation tax from 20% to 15%.
Here is the chart from Morgan Stanley showing the crazy uncertainty in UK economic policy right now:
And here is Morgan Stanley’s key quote (emphasis ours):
“We see multiple sources of uncertainty after the vote to leave, which underpin a wide span of possible outcomes. The political circumstances after the vote in particular have turned out to be very challenging, including the Prime Minister resigning, unexpected developments in the Conservative leadership campaign, a standoff between the leader of the Labour Party and many Labour Party MPs, and a fresh push for Scottish independence from the Scottish nationalists.”
“Against this background, Carney argued in his speech that there has been a particularly high level of “policy uncertainty” in the UK this year. We think this implies a case for early action as a signal of intent, to reinforce confidence in policy frameworks, reduce uncertainty and support adjustment.”
Since Morgan Stanley published its research, political uncertainty has increased even more, with the shock resignation of UKIP leader Nigel Farage at a press conference on Monday morning.
The uncertainty surrounding economic policy from a governmental level, Morgan Stanley argues, will lead the Bank of England to do as governor Mark Carney suggested late last week, and cut interest rates for the first time since 2009, with the bank arguing for a cut to as low as 0.1%. Here is the key quote:
“The MPC has been reluctant to cut rates to negative levels, on the grounds that they see negative rates as a risk to financial stability,and unsustainable for an extended period of time,and therefore not fully credible.We think that they would prefer to see policy rate staying modestly positive, and we therefore see 10 bp as the effective floor for policy rates.”