Growth

Today the Daily Mail (I won’t link to it) is reporting on the reduced growth forecasts by the IMF, and quotes Douglas Carswell calling the IMF ‘clowns’. DM thinks that the forecasts are a cause for celebration because they’re not as bad as they could be.

The IMF’s current forecasts are based in part on the fact the markets seemed relatively unperturbed the prospect of brexit. But brexit is poorly-defined and predictions based upon it should be treated with caution.

There are three options: 1. No brexit, 2. Soft brexit (leave EU, stay in EEA), 3. Hard brexit (leave EU and EEA, go it fully alone). Only #3 is a dangerous scenario economically, and there’s almost certainly no mandate for it, but it might happen anyway because our woefully open ended referendum question might be taken to be synonymous with leaving the EEA, even though it very literally was not.

Nobody knows the probabilities of any of the different brexit possibilities (not that that’s a meaningful question), but instinctively you’d probably go with something like this: no brexit: 30%, soft brexit: 50%, hard brexit: 20%. Under my model, investors would be pricing in an 80% chance of no disruption to their businesses. This means that it’s mostly business as usual for the moment, but if hard brexit starts looking more likely, there’ll be a potentially big correction on the way.

Regardless, only an extraordinarily stupid person could perceive a significant reduction in growth as good news. For young people it’s very bad news as it damages their retirement prospects. Between the 2008 crash and a hard brexit, a lot of people in their late 20s and early 30s are yet to earn against the backdrop of high economic growth, and are unlikely to do so in the next 5-10 years. This means many people will spend a third of their expected working life seeing little real growth on their retirement savings.

So overall: yes, sorry, brexit is still a really stupid decision.

By the way, Douglas Carswell is not your friend unless you’re very rich. He’s a free market liberal (or libertarian in American terminology). He has extreme ideas like removing working benefits because he believes that they suppress wages. This sounds superficially sensible, but if it were true then the same mechanism would increase wages if income tax rates were increased and reduce wages if income tax was cut. And I don’t think anyone’s first reaction to higher income tax is “that’s ok, my employer will make up the difference”. It is fitting that he represents one of the most deprived constituencies in the UK, because if his ideas were implemented, a lot more areas would look like Jaywick.

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One comment on “Growth
  1. Thanks for this blog post regarding Brexit; I really enjoyed it and am definitely recommending this blog to my friends and family. I’m a 15 year old with a blog on finance and economics at shreysfinanceblog.com, and would really appreciate it if you could read and comment on some of my articles, and perhaps follow, reblog and share some of my posts on social media. Thanks again for this fantastic post.

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