David Skilling: Britain should think small

The first year of the Brexit process has not been a good one. The best that can be said is that we now know that it is too late to properly execute a ‘hard Brexit’ and at the same time the process is too far advanced for ‘second thoughts’. A soft Brexit, made in Brussels rather than London, is the most likely outcome. At what is effectively ‘half-time’, there are many lessons to be drawn for Britain. Viewed from outside the UK, a couple stand out.

The first is that the world beyond Britain is changing. As Britain retreats from Europe, the EU has begun to emerge as a more coherent strategic bloc – to the extent that Boris Johnson and Jacob Rees Mogg can complain about becoming a ‘vassal state’. From free trade agreements with Japan and Canada, to leadership on global climate change negotiations, to its increasingly deliberate stance with respect to China, the EU is realising its potential as a big power. This, of course, is partly motivated by the withdrawal – at least for the moment – of the US from its global leadership role.

David Skilling: Small countries in an age of giants

Singapore is benefiting from a strengthening global economic recovery with increasing external demand supporting export-oriented sectors. Advance estimates are for GDP growth of 4.6% for the year to Q3 2017. And the 13-strong group of small advanced economies that I monitor are growing as strongly as they have since 2011.

This economic good news contrasts with the concerns about populism and protectionism raised over the past couple of years, to which small countries were thought to be particularly exposed.

David Skilling & Michael O’Sullivan: The beginning of the end

At the 10th anniversary of the start of the global financial crisis, the remedies put in place to staunch its financial and economic effects remain. However, in a sign that the global economy has stabilized, central bankers are signaling the end of their super-accommodative monetary policies.

The “great normalization” began with the U.S. Federal Reserve raising rates three times amid deafening silence from low-volatility markets. Other authorities have followed, notably the European Central Bank, with markets egging on the end of quantitative easing, and the Bank of England, where a debate on inflation is underway. Both the euro and the pound have risen against the dollar, but in both cases diminished political risk has played a role.

David Skilling: What can we learn from the Greeks?

Two Greeks have been in the news again recently.  The first, Yanis Varoufakis, was the Finance Minister during the depths of the Greek crisis.  He has just published another book, attracting celebrity endorsements, apportioning blame to many for the continuing agonies in Greece.  FT columnist Martin Wolf commented charitably on his book, and fellow columnist Wolfgang Munchau remarkably suggested that the Brexiters could learn from Greece.

Few emerge from the Greek crisis looking good, including senior Ministers in the Syriza government.  Playing chicken, and railing against austerity and Germany, may be good fun, but it did little to address Greece’s underlying challenges. Greece has a debt problem, but the core issue is that Greece is deeply uncompetitive.  Even debt relief and a lower cost structure (or in extremis, a depreciated currency outside the Eurozone), is unlikely to be sufficient for the Greek economy to perform better on a sustained basis.

David Skilling: Just when you think it’s safe

One year on from the Brexit vote in June 2016, the UK is going around in circles with no political consensus on how to approach the negotiations – or even what they would like to achieve.  There is not a sufficiently large constituency for the hard Brexit approach seemingly favoured by PM May.  This opens the door for a softer, more pragmatic Brexit, with lower economic costs – but also raises the odds of the UK crashing out of the EU with no deal.

But relative to the concerns that were held in the shocked aftermath of the initial Brexit vote, the fallout has been localised. 

David Skilling: When China shakes the world

After another bad week for Western (or more precisely, Anglo) political leadership – from the revelations in Mr Comey’s Senate testimony, to the political uncertainty in the UK after a remarkably poor election campaign – it is worth thinking about China’s emerging position of global leadership.

This emergence is partly due to US withdrawal on global issues like trade and climate change. But the behaviour of the US is simply accelerating what was an inevitable rebalancing of economic and political leadership.  China overtook the US as the world’s biggest economy (in PPP terms) in 2014, and may well become the largest economy on market exchange rates in the next few decades (although there are many risks to this, as noted below).

David Skilling: House of Cards

The fifth series of House of Cards was released this week on Netflix, although it is not clear how we should distinguish between the fictional series and the non-fiction (perhaps science fiction?) occurring in the real-life White House.  But a house of cards remains an apt metaphor for housing markets around the world, and particularly in small advanced economies, which are deeply exposed to the process of interest rate normalisation.

In a previous edition of this note, I discussed the particular challenges that QE by large economy central banks has imposed on smaller economies, and particularly on the eight small advanced economies outside the Eurozone: Norway, Denmark, Sweden, Switzerland, Israel, Hong Kong, Singapore and New Zealand.  As price takers, each of these small economies has had to set monetary policy in a way that reflects the world interest rate (even more so for economies that are directly pegged to other currencies, Denmark to the euro and Hong Kong to the USD). 
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