WEBVTT - Surveillance: Coulton

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<v Speaker 1>Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.

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<v Speaker 1>Always with Michael McKee. Daily we bring you insight from

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<v Speaker 1>the best in economics, finance, investment, and international relations. Find

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<v Speaker 1>Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of

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<v Speaker 1>course on the Bloomberg. It's the most hotly anticipated Bank

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<v Speaker 1>of England decision of this decade. Well maybe not of

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<v Speaker 1>the second because actually it was highly anticipated also three

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<v Speaker 1>weeks ago. Anything post Brexit is highly anticipated. Governor Mark

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<v Speaker 1>Karny has expect to cut rates in about ninety minutes.

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<v Speaker 1>We'll bring in Brian Colton, now Fit Ratings chief Economists

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<v Speaker 1>to exactly talk us through what he's expecting. Brian, great

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<v Speaker 1>to have you on the program. This is highly anticipated.

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<v Speaker 1>Last month, it was highly anticipated until we get of

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<v Speaker 1>some kind of an idea resolution about what the data

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<v Speaker 1>post Brexit looks like. We need to have the BOE

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<v Speaker 1>try and help us figure it out. Absolutely, I mean,

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<v Speaker 1>this is a very important meeting, but we certainly I

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<v Speaker 1>don't think you can expect any big bazookers at this one.

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<v Speaker 1>I mean, if we think about the radical moves that

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<v Speaker 1>people have been talking about them going to negative interest

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<v Speaker 1>rates or even very sharply ramping up the QUEI program.

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<v Speaker 1>I'm not sure either those are really appropriate at this stage.

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<v Speaker 1>Negative rates, well, the biggest impact we've seen elsewhere from

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<v Speaker 1>negative rates has actually been to weaken the currency. Sterling

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<v Speaker 1>is already weakened a lot of the Bank of England

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<v Speaker 1>can't completely ignore the impacts of Sterling on inflation and

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<v Speaker 1>then on on QUEI. Where the benefits there were to

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<v Speaker 1>being long term interest rates down, well they've come they've

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<v Speaker 1>come down. So I think it's going to be much

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<v Speaker 1>more nuanced than that, and to sub extent, as you

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<v Speaker 1>intimate in your question, there will be more interesting I

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<v Speaker 1>think in what the Bank of England thinks is happening

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<v Speaker 1>to the economy from this Brian, what do you think

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<v Speaker 1>is happening? Because we had some some pretty terrible figures,

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<v Speaker 1>But you you need to take a view on whether

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<v Speaker 1>the month of July, because of the shark of Brexit,

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<v Speaker 1>which the markets and businesses weren't expecting, is for that month,

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<v Speaker 1>or whether it's a trend that will continue as we

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<v Speaker 1>go on that the measures we've had so far we're

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<v Speaker 1>really just a couple of survey indicators. We haven't. We haven't.

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<v Speaker 1>They were pretty bad. We haven't yet had which is

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<v Speaker 1>coming out of factories. Those the real hard data. We'll

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<v Speaker 1>get those in the next two or three months and

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<v Speaker 1>when we have a clear opinion there. I think it's

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<v Speaker 1>pretty clear though that the level of uncertainty now is

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<v Speaker 1>so so elevated about about what's the UK's future trading relationship,

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<v Speaker 1>what's the regulatory framework going to be. Firms are not

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<v Speaker 1>going to be doing the capex. There is going to

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<v Speaker 1>be a big hit to capex. Bever agent to see

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<v Speaker 1>how much that the Bank of England expects that. Brian,

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<v Speaker 1>I want to congratulate you on the clarity of your

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<v Speaker 1>note from Fitch. The elephant in the room is inflation.

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<v Speaker 1>In two thousand and seventeen, you've got a nominal GDP

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<v Speaker 1>and animal spirit for the United Kingdom that tells me

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<v Speaker 1>they can't cut rates help me with real GDP plus big, big,

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<v Speaker 1>big inflation next year. Does that limit Mark Kearney's optionality?

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<v Speaker 1>I think it does to some extent. I mean we've

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<v Speaker 1>already had fall in the current see we think that

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<v Speaker 1>that's going to push up import prices in the UK.

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<v Speaker 1>We've actually got inflation going slightly above three p m.

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<v Speaker 1>I don't. I don't think that they can. They can

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<v Speaker 1>be uh too gung hole on pushing interest rates deep

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<v Speaker 1>deeply negative with with that scenario. Mark Connie said this himself,

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<v Speaker 1>it's a very difficult situation to find themselves in here

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<v Speaker 1>post Brexit. Yes, we've got a big demand shop from Capex,

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<v Speaker 1>we've also got a shock to the UK supply side.

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<v Speaker 1>Growth potential will be impacted by lower FDI, by by

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<v Speaker 1>lower immigration. So there's a there's a there's a supply

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<v Speaker 1>shop there, and then we've got the currency as well.

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<v Speaker 1>That those latter two things mean more inflation. The trade

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<v Speaker 1>off between output inflation in the UK is going to

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<v Speaker 1>be worse. That makes it more complicated for a central

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<v Speaker 1>bank US to engage in easy in francy. And what

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<v Speaker 1>we just heard there was a clinic that Mark Kearney

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<v Speaker 1>has tattooed to his brain and his experts at the

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<v Speaker 1>Bank of England. Hey, it's not as simple as saying

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<v Speaker 1>Brexit bad, lower raids in fancying, I would go back

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<v Speaker 1>to currency is the definitive and definitive of inflation reaction, right,

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<v Speaker 1>I mean Tom overall, I think when you look at

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<v Speaker 1>central banks. I don't think anything is easy. It's all

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<v Speaker 1>in the nuances. It's all who gets hit how and

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<v Speaker 1>what's the best transmission mechanism on pound? And actually this

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<v Speaker 1>would be my private big question to Brank Colden. So

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<v Speaker 1>we had a drop more or less in pound, right,

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<v Speaker 1>we recoup some of that, but who does it actually

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<v Speaker 1>help services? Which is what this country is very good at.

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<v Speaker 1>Do you see an increase in services demand as pound

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<v Speaker 1>files or not? Really? It's not like you're you know,

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<v Speaker 1>selling engines. Sure, it's funny. And when when we're talking about,

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<v Speaker 1>you know, how does sterling benefit the UK economy, Now

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<v Speaker 1>we're talking about things like the number of foreign students

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<v Speaker 1>that want to come to the UK for a university degree.

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<v Speaker 1>You know those those are not things that change very

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<v Speaker 1>very quickly, you know, sustainful in the pound over three

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<v Speaker 1>or four years. Yeah, but you don't get the kind

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<v Speaker 1>of suddenly we selling loads more cars to Germany. I don't.

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<v Speaker 1>I don't think there's necessarily a huge benefit that And

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<v Speaker 1>in fact, that was one of the things happened after

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<v Speaker 1>the global financial crisis, the falling sterling. We all thought

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<v Speaker 1>we're going to have a big booster from net trade

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<v Speaker 1>didn't didn't really come through, you know, we don't. We

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<v Speaker 1>don't sell that much exchange rate sensitive stuff anymore on

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<v Speaker 1>manufacturing site and brand. When Tom was talking about nuances,

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<v Speaker 1>I guess the project that it's not as simple as

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<v Speaker 1>avoiding recession. You also need to see what happens to inflation,

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<v Speaker 1>because if this country doesn't get access to a a single market,

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<v Speaker 1>the goods that the UK will be importing can shoot

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<v Speaker 1>up inflation at a time where actually see a recessionary environment.

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<v Speaker 1>And I think you've got to remember, you know, and

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<v Speaker 1>this is a broader global issue. You know, the trend

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<v Speaker 1>towards globalization to more more more trade, you know, has

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<v Speaker 1>been negative for for prices. That's that's helped bring inflation down.

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<v Speaker 1>If we if we go back to world where we're

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<v Speaker 1>pulling up the drawbridge, we're less open, we're gonna have

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<v Speaker 1>less disinflation coming from abroad, and that's something that bank

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<v Speaker 1>coming and will have to take into account. Definitely. We

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<v Speaker 1>only think we're gonna get a twenty five basis point

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<v Speaker 1>cut today. Brian, let's revisit the chart from the last

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<v Speaker 1>week of June. Bring it up your boding if you would.

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<v Speaker 1>This is the trade chart. The purple line is goods

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<v Speaker 1>and services and it's remarkably level, as Sherman greens And

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<v Speaker 1>would say quiescent. But the white line includes in the

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<v Speaker 1>money flooding into the United Kingdom. The red circle is

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<v Speaker 1>sort of that break where we see a horrific current

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<v Speaker 1>account deficit. Brain, what's a dynamic here? Is this chart

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<v Speaker 1>going to force Mark Kearney's hand? Well, the current account

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<v Speaker 1>deficit is certainly a consideration in you know, what's what's

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<v Speaker 1>going to happen to the economy. Obviously, you know we've

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<v Speaker 1>been spending more than our income and that's been financed

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<v Speaker 1>through through strong FDI inflows, including into UK commercial property.

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<v Speaker 1>Of what what we have to bear in mind is

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<v Speaker 1>that I think those capital inflows were to dry up

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<v Speaker 1>too quickly, then we'd have to close that current account deficit.

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<v Speaker 1>We'd be forced to close that current account deficit that

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<v Speaker 1>much more rapidly. That actually means a worse recession. You

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<v Speaker 1>need a bigger decline in UK domestic demand as as

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<v Speaker 1>the foreign funding draws up. So that's a consideration when

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<v Speaker 1>the central Bank's deciding how far to to to to

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<v Speaker 1>cut interest rates and force the depreciation in Sterling itself

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<v Speaker 1>has helped on that front. It's made assets cheaper. We're

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<v Speaker 1>hearing lots of non European investors now getting interested in

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<v Speaker 1>some of the UK UK assets because sterling is weaker.

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<v Speaker 1>So that is one sort of way in which a

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<v Speaker 1>week sterling helps. But if we're getting too a sort

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<v Speaker 1>of ongoing weakening of sterling, then that could be counterproductive

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<v Speaker 1>and I think they need to at least think about

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<v Speaker 1>that in what they do today. Your work has been

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<v Speaker 1>brilliant and as I really appreciate the idea of how

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<v Speaker 1>big inflation is going to be for the United Kingdom,

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<v Speaker 1>what this comes down to is a basic idea can

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<v Speaker 1>a bank get out in front of the debate? We

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<v Speaker 1>call that in America the ex post x anti debate.

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<v Speaker 1>Schwarz and Friedman have looked at this. Richard Timberlake within

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<v Speaker 1>the Georgia School and others. Where is Mark Kearney today?

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<v Speaker 1>Is he gonna be ex post after he season numbers

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<v Speaker 1>or is he going to really try to be ex

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<v Speaker 1>ante is the city in the street want him to be?

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<v Speaker 1>I think it will be more expost to be honest.

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<v Speaker 1>I think you know that there's very strong arguments as

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<v Speaker 1>to why the UK economy is gonna is gonna weak

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<v Speaker 1>and but the level of level of certainty we have

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<v Speaker 1>about that is very low, and I just don't think

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<v Speaker 1>you can really be expecting the Bank of England to

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<v Speaker 1>to offset the slowdown that we're gonna We're gonna have

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<v Speaker 1>the you know, the nature of the shop we're worried

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<v Speaker 1>about here is that companies are not going to be

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<v Speaker 1>making the big ticket spending items a large hard to

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<v Speaker 1>reverse spending items. They're just not going to be doing

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<v Speaker 1>that now. Cutting interest rates twenty five basis points, it's

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<v Speaker 1>really not going to make very much difference on that.

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<v Speaker 1>So I don't I don't see how much of policy

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<v Speaker 1>of anything more than really kind of defensive and reactive here.

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<v Speaker 1>You know, what they really want to make sure they

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<v Speaker 1>avoid is that this investment and uncertainty shock transforms itself

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<v Speaker 1>into something worse, which is a rise in interest rates,

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<v Speaker 1>are tightening in credit conditions in the UK. That's where

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<v Speaker 1>they can help, But that is by its nature reactive,

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<v Speaker 1>and I think that's where we're going to be. Brian

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<v Speaker 1>Corton with us here with Fitch. Brian, that yellow circle

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<v Speaker 1>is where you think nominal GDP or the animal spirit

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<v Speaker 1>of the United Kingdom will be that really really limits

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<v Speaker 1>Mark Curney's ability to cut interest rates doesn't and I

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<v Speaker 1>still think they can. They can, they can move lower

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<v Speaker 1>near term, and when we think the the impact of

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<v Speaker 1>Brexit on demand is going to outweigh the impacts of

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<v Speaker 1>Brexit on potential supply in the short term, but I

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<v Speaker 1>think over the medium term, I would say this that

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<v Speaker 1>the output inflation trade off in the UK is going

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<v Speaker 1>to be worse post Brexit, and that probably means UK

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<v Speaker 1>interest rates if anything, I've got to be more volatile

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<v Speaker 1>than before. So we've got rates going down, but as

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<v Speaker 1>immigration flows slowed down, as inward FDI slows down, potentially

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<v Speaker 1>impact on UK product productivity. It's it's not going to be.

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<v Speaker 1>It's not gonna be a one way, one way trick

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<v Speaker 1>in terms of just just trying to boost demand. They've

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<v Speaker 1>got to take into account the fact that that supply

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<v Speaker 1>supply growth is not going to be a strong either.

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<v Speaker 1>Right now. I want to bring that banner up. So

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<v Speaker 1>this is I get I give time, keen and a

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<v Speaker 1>plus right currently must will could may wait. This is

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<v Speaker 1>the problem with our central banks, and it also depends

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<v Speaker 1>on whether they follow the markets too closely. We saw

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<v Speaker 1>that with forward guidance. Mrkarni abandoned here. It's a similar

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<v Speaker 1>situation between the dark plots and actually being data dependent.

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<v Speaker 1>I think forward guidance to this point, to be honest,

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<v Speaker 1>would not be particularly sensible because they just don't know

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<v Speaker 1>what the economy is going to do. Uh. You know

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<v Speaker 1>that that that mixes, that mix has changed that you know,

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<v Speaker 1>the models that they had are probably not going to

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<v Speaker 1>work out that world for them. You know, Mark Carnie

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<v Speaker 1>can't avoid the post Brexit slowdown in the UK. You

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<v Speaker 1>can only kind of make it easier, we think just

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<v Speaker 1>about and that's because partly because you get a bit

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<v Speaker 1>of an export boost from weaker sterling, but also a

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<v Speaker 1>bit of expenditure switching. So we think, you know, investment

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<v Speaker 1>is the most important intensive component of demands, so the

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<v Speaker 1>investment weekends, imports will weaken and so you'll get a

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<v Speaker 1>sort of you know, along with the fact that imports

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<v Speaker 1>are going to be more expensive, bit of export we

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<v Speaker 1>call expenditure switching. So you know, for every pound that

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<v Speaker 1>a UK residents spend a little bit more of that

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<v Speaker 1>will be spent on UK goods. So that's probably what

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<v Speaker 1>gets us out of a recession. We actually think if

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<v Speaker 1>you look at domestic demand that's going to go down

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<v Speaker 1>in seventeen in the UK, so demand recession, but not

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<v Speaker 1>a GDP recession. Bryan, this has been fabulous. Brank Holton,

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<v Speaker 1>thanks for a terrivic brief. He is with Fitch. Thanks

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