M atthew Elliott, founder of The Taxpayers’ Alliance and one of the country’s foremost political strategists, attended a dinner recently with the Ipswich Suffolk Business Club. As you’d expect, he talked about Brexit, the global rise of populism, Russia, how you go about striking international trade deals. A lively session of Q&A followed with many questions focusing on international trade. In 2008 we learnt, painfully, that the UK economy is global and interlinked. Like the “butterfly effect” in chaos theory, a small change in one part of the economy can result in large and unforeseen changes elsewhere. Coupled to that, all students of economics know that economies are cyclical. Since 1984 we in the UK have achieved balance by running a surplus on long-term capital inflows. These are set up when a company based overseas decides to buy a UK business, or sets up in the UK. The bulk of this investment comes from firms in EU member countries and the USA.
The uncertainties around Brexit mean that we can’t be sure what EU and US firms will do. But should they reduce their investment flow we will have to finance our deficit instead using short term capital. This is very volatile and consists of global liquidity which moves between financial centres in search of the best return. It is either cash, and/or the purchase of bonds and equities. To be more attractive than Frankfurt, or Paris, or New York, or Tokyo the UK needs a cheaper currency and/or higher interest rates. Assume we decide that cheaper currency is the best way (the Bank of England does not raise interest rates significantly). Then as the pound falls in value so, with a time lag, domestic prices will rise. As a rough guide every 10% fall puts 1% on inflation within a year. Assuming the Government doesn’t raise the inflation target then the Bank of England must increase interest rates.
Luke Morris , Corporate Partner at Scrutton Bland gives his personal view on the current economic situation, and why global events can impact local businesses.
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