Carney speech: What the media say
Here’s our economics editor, Larry Elliott, on governor Carney’s speech:
Brexit is an acid test of whether it is possible to reshape globalisation in a way that offers the benefits of trade while allaying public fears about the erosion of democracy, the governor of the Bank of England, Mark Carney, has said.
Speaking in London, Carney said the ramifications of the UK’s departure from the EU would be felt around the world and would determine whether it was possible to shrug off rising protectionism in favour of a new era of international cooperation.
The governor cited trade tensions and the result of the 2016 referendum as examples of fundamental pressures to reorder globalisation.
“It is possible that new rules of the road will be developed for a more inclusive and resilient global economy. At the same time, there is a risk that countries turn inwards, undercutting growth and prosperity for all.”
The FT’s Kate Allen was also struck by Carney’s comments on Brexit, and the dangers that a trade disruption causes:
“We are 45 days before the possibility of [no-deal happening] . . . we should not be under any illusions — no-deal Brexit would be a shock for this economy and send a signal globally about the prospects of refounding globalisation,” he said at the event, which was hosted by the Financial Times.
Asked whether Brexit was a canary in the coal mine for the new global order, Mr Carney replied: “The bird may be towards the bottom of the cage, but it is still fluttering.”
Sky News’s Ed Conway has mopped up some of the best charts from the speech (it’s not proper central bankers’ speech without a few visual aides)
The Telegraph’s Tom Rees has flagged up Carney’s warning that a trade war could cause an economic crunch not seen since the mid-1970s.
As the governor put it:
Most fundamentally, the larger and the more permanent the disruption to global trade—the greater the de- globalisation—the greater the reduction in both activity and supply capacity of economies. The latter—a material hit to supply—is something that advanced economies have not experienced since the mid-1970s.
In this scenario, the combination of slower growth, smaller surpluses in Asia and higher risk premia could move global interest rates higher, increasing the burden of corporate and household debts and challenging the creditworthiness of some sovereigns.
Charles Hepworth, Investment Director at asset manager GAM, says the Brexit deadlock is making some UK assets ‘untradable’.
Here’s his take on the situation as we rattle towards Brexit Day with no certainty over the future:
“Negotiations are stuck with the EU refusing to concede on any points – the already agreed deal is the final deal as far as they are concerned. And to be honest it’s probably the same view that May is taking – both essentially running down the clock to the final vote date. Thursday sees the start of extended debate in Parliament as to what happens next as they vote on ‘Plan B’ and the rest of the alphabet options.
“However not much really can come next – all that she hopes will happen is that those who voted overwhelmingly against her in her first attempt to pass the original deal through Parliament may be spooked that with so little time left and with the prospect of no-deal being so disastrous that they will have to switch to support her original deal. This uncertainty would be reflected in increased sterling and market volatility and, cynically, the government could use market turbulence to its advantage to push through a deal. It’s a supremely high stakes game of chicken she is playing with both the EU and the UK parliament. She reaffirmed her promise to allow the final vote on her ‘probably unaltered’ original on the 27th of this month. Einstein’s definition of lunacy was to keep doing the same thing over and over again and expecting a different result.
“The government’s actions are negative for the UK economy, currency and assets – which don’t look tradable to us at this point. The question remains what happens should the prime minister’s efforts fail again? Delaying the March deadline and trying again wouldn’t be beyond the realms of the lunacy so far we have seen in Parliament. The other avenue is a hard Brexit which has no support at all and so cannot be expected to happen. There is still the faint likelihood of the “People’s vote” option – I’m undecided if that ship has sailed yet. Right now it seems that delaying until her deal is forced through Parliament is the most likely option.”
Back on Brexit, governor Carney is hammering home the need for certainty, warning that the situation could go “quite badly”.
But he also agrees that the economy has strengths, such as the state of household and corporate balance sheers, readiness of financial sector for Brexit and the long-established strengths of the economy.
Carney also suggests that global conflicts could be the trigger that ends the global expansion.
Mark Carney is now taking some questions about his speech (highlights start here).
The FT’s Chris Giles whizzes a fast delivery at the governor:
Q: Are you saying that Britain is the canary in the coal mine for the new world order, and it’s not going very well….
Carney is tempted into playing the metaphor, joking that:
The bird may be towards the bottom of the cage, but it’s still fluttering.
He then explains that Brexit is a leading indicator – but the factors that led to the the Brexit vote are also building in other countries, and will create new challenges there too.
So policymakers need to rethink trade rules, and adjust the balance between rules made domestically and beyond.
As Carney puts it
The fundamental issue at the heart of the Brexit discussions – …. are ones which the global economy needs to grapple with.
Thus, it will be “a source of deep concern” if the Uk and EU can’t reach an agreement, as it won’t be a good leading indicator of how other countries will cope with similar challenges in the future.
This is why the Bank of England is concerned about China’s slowing economy:
During his speech, Mark Carney also cites the idea that globalisation has created an impossible “political trilemma”. Basically, that we can’t have democratic accountability, national sovereignty AND be fully integrated in the global economy.
Any two is fine, but the hat-trick is impossible (ie – a eurozone country surrenders some sovereignty when it joins the single currency, while any country loses democratic accountability if the IMF imposes bailout conditions).
It’s an idea created by Harvard academic Dani Rodrik (see here).
As Carney puts it:
Globalisation leads to imbalances of democracy and sovereignty, leading many to lament a loss of control and to lose trust in the system. As Dani Rodrik has argued, there is a trilemma between economic integration, democracy and sovereignty.
Common rules and standards are required for trade in goods, services and capital, but those rules cede or, at best pool, sovereignty. To maintain legitimacy, the process of agreeing those standards needs to be rooted in democratic accountability.
Much will be required to create a more inclusive, sustainable globalisation but part of the solution is a more flexible and open trading system for services and for small and medium enterprises.
Mark Carney also warns that Brexit has hurt the UK economy – and is a warning of the damage that global trade uncertainty can cause.
Citing yesterday’s weak UK GDP report, he says:
UK business investment has fallen 3.7% over the past year despite the ongoing expansion, high business profitability and accommodative financial conditions.
With fundamental uncertainty about future market access, UK investment hasn’t grown since the referendum was called and has dramatically underperformed both history and peers
Carney: Brexit will be ‘acid test’ of new global order
Mark Carney rounds off his speech with a pop at Donald Trump, telling his audience at the Barbican that “Contrary to what you might have heard, it isn’t easy to win a trade war.”
And he concludes with some eye-catching comments on Brexit, saying it’s important to reach a “solution” in the coming weeks.
Britain’s departure from the EU, he says, will be an ‘acid test’ of whether politicians can achieve a new form of international co-operation, while respecting democratic accountability.
As the governor puts it:
If the UK has been somewhat more inwardly focused of late, it has been for good reason.
In many respects, Brexit is the first test of a new global order and could prove the acid test of whether a way can be found to broaden the benefits of openness while enhancing democratic accountability. Brexit can lead to a new form of international cooperation and cross-border commerce built on a better balance of local and supranational authorities. In these respects, Brexit could affect both the short and long-term global outlooks.
And finally, he returns to that old explorer, Sir Martin Frobisher, who we heard about a few minutes ago.
It is in the interests of everyone, arguably everywhere – from Frobisher’s grave to Frobisher’s Bay – that a Brexit solution that works for all is found in the weeks ahead.
Turning to globalisation, Carney says it has brought “widespread prosperity”, but it has also created external imbalances — with large trade surpluses in some countries (eg Germany), and deficits in others (eg UK) (corrected!).
Plus, the benefits haven’t been shared evenly:
Rather, the benefits from trade are unequally spread across individuals and time. Consumers get lower prices and new products, and further benefits from higher productivity over time.
Some workers, however, lose their jobs and the dignity of work, or see their “factor prices equalised.” In plain English, their wages fall.
Carney: recessions are difficult to spot
Mark Carney cites the risk of China’s slowing economy, the push for “de-globalisation”, and rising protectionism as key threats.
He also warns that policymakers may struggle to spot a recession, until it happens:
Given the confluence of the current broad-based slowdown and outstanding downside risks, some are beginning to wonder whether the global expansion, begun in 2010, could be starting to end.
Recessions are notoriously difficult to predict. The IMF has anticipated only a sixth of the over 300 recessions in member countries since 1991. Financial markets are more likely to cry wolf, making Paul Samuelson’s observation fifty years ago that “the stock market has predicted nine of the past five recessions” as relevant today as it was then.
For what it is worth, market-implied probabilities of a recession in the US are around 20%, nearly three times higher relative to this time a year ago.
Mark Carney says the deceleration in the world economy is partly because central bankers have begun tightening monetary policy (through higher interest rates), as they (slowly) unwind the stimulus packages created after the financial crisis.
But there is another culprit — trade wars.
The BoE governor says:
Potentially more seriously, the slowing in global momentum may also be the product of rising trade tensions and growing policy uncertainty.
Carney: Global economic picture is darkening
Over in the Frobisher Hall at London’s Barbican, Mark Carney is delivering his speech on the global economy.
The Bank of England governor begins with a nod to his Canadian homeland, telling his audience that their location is named after Sir Martin Frobisher, an English navigator who scoured Canada’s eastern arctic coast in the 16th century looking for new trade routes.
(apparently most of Sir Martin’s remains are buried in the St Giles-in-the-Fields churchyard, although St Andrew’s Church in Plymouth snaffled his heart and entrails).
Carney says there is a link between Sir Martin and the world economy:
Martin Frobisher is perhaps more famous in Canada than in his native land. One of the great bays in the eastern arctic is named after him. The capital of Nunavut, Iqaluit, lies at the innermost end of Frobisher Bay.
Nine years ago this month Iqaluit hosted the G7 meeting that marked the start of the euro crisis. Events that still reverberate today including in the environs of the Barbican.
That G7 meeting also treated us to the sight of Carney’s predecessor, Mervyn King, taking a somewhat undignified trip on a dog sled.
Conditions today may look better than in 2010, when the world was struggling back from the financial crisis. Carney, though, sees problems ahead….
While the debate in the United Kingdom has been understandably dominated by Brexit, the world has been otherwise engaged.
When the Referendum was being held, the global economy was emerging from a long period of financial repair and lacklustre growth. Over the subsequent two years, a widespread and increasingly vigorous global expansion took hold. For the first time since the financial crisis, business investment and foreign trade grew strongly across all major regions. Economic uncertainty diminished, and consumer and business confidence firmed. In economies close to full employment, real wages finally began to grow.
A new beginning seemed possible.
In the past few quarters, however, these trends have largely reversed. After peaking a year ago around 4%, global momentum is now weakening in all major regions and downside risks have intensified. The proportion of the global economy growing above trend has fallen from four-fifths to one-third. Trade growth has slowed and the export outlook has dimmed. Capital goods orders are stagnating, investment growth has become more tepid, and business confidence is diminished.
Heads-up. Bank of England governor Mark Carney will be speaking in London shortly, about the world economy, and key risks to the global outlook.
The oil price has also risen today, on hopes of a trade breakthrough in Beijing. US crude is up almost 2% at $53.37 per barrel.