We can all pause for breath: early indications suggest that the referendum result has not had an immediate disruptive effect on the UK economy. In the words of the chief economist at the Office of National Statistics, Joe Grice, the economy “hasn’t fallen at the first fence but longer term effects remain to be seen”.
The UK’s stock markets have recovered, with the FTSE 100 reaching a 14 month high in August, following an initial drop a day after the referendum, exports have benefited from the weaker pound and even business confidence showing signs of recovering.
So were initial apocalyptic post-Brexit predictions all a bit over dramatic? Well perhaps, but that doesn’t mean that financial instability has diminished. Despite raising its forecasts for Britain’s economic growth in 2016 from 1.7% to 1.8%, the Organisation for Economic Co-operation and Development (OECD) has recently halved its forecast rate of growth for 2017 to 1%.
The UK is not alone in experiencing slow economic growth despite interest rates being close to zero. So what can be done to stimulate it?
One option, as discussed in last month’s Click & Invest investment market review, is to continue with existing policy and keep lowering interest rates and expand quantitative easing. However the benefits of this type of monetary policy may well start to become skewed as time goes on. What happens, for example, if Banks continue to make reduced profits from the loans they are offering? Will this make it increasingly difficult for us to take out a loan in the future? And if companies end up having to put aside more of their profits to pay out pensions because of interest rates falls, what are the implications for dividend payments and capital investments?
Like a storm looming on the horizon, we might find complications down the road that impact everyone from homeowners to those planning their retirement. With little room for further interest rates cuts, tried and tested monetary policy may be running out of steam, so once again all eyes are back on fiscal policy.
What is fiscal stimulus?
Fiscal stimulus is when governments change taxation policies or vary spending on public projects in order to influence the economy.
If lowering interest rates is the central bank’s most effective way to revive the pulse of a slowing economy, then fiscal stimulus is often touted as the government’s very own defibrillator. Slashing tax rates or building new roads, so the thinking goes, increase disposable income or creates jobs and more jobs means more spending.
The real impact of fiscal stimulus, however, has been hotly debated for decades as many argue that it doesn’t take into account other factors, such as the general public’s tendency to save rather than spend when the government tries to inject cash into the economy.
In any case, the next Autumn Statement is planned for November 23rd and if the new chancellor does announce plans to ‘reset’ fiscal policy, as he has hinted, then investors will need to start thinking about what this means for bond prices and inflation. Click & Invest will be offering regular market commentary throughout this period so click here to subscribe to our monthly newsletter and keep up-to-date with all developments.