Our leap into the unknown threatens both Europe and the world economy
Alan Greenspan has seen more than a few dicey days on global markets in his time. So it was telling when the 90-year-old former chairman of the US Federal Reserve described the market chaos sparked by Britain’s leave vote as “the worst period I recall”.
“There’s nothing like it, including the crisis – remember 19 October 1987, when the Dow went down by a record amount of 23%? That I thought was the bottom of all potential problems. This has a corrosive effect that will not go away,” Greenspan told the broadcaster CNBC.
He is right. Brexit is about so much more than financial market turmoil. As Greenspan, who presided over the Federal Reserve for almost two decades, warned: “This is just the tip of the iceberg.”
A referendum many thought should never have been called in the first place has seen a narrow majority decide that the country should break away from the European Union at a time of great economic and political uncertainty.
The worry for other EU leaders is that Britain’s Leave vote will spark a domino effect throughout the rest of the continent, where forces of economic nationalism and anti-immigration politicians have already been gaining ground. For the eurozone’s fragile economic recovery, this new phase of uncertainty could dash consumer spending, derail business deals and probably force the European Central Bank into yet more unconventional measures to get cash into the economy and shore up confidence.
In Italy, alarm bells are already ringing that the economic consequences of Brexit could bring some of the country’s vulnerable banks even closer to the brink of collapse. Milan’s stock index suffered its biggest one-day drop in history after the UK result was announced.
The shock waves could spread further still, says international thinktank the Organisation for Economic Co-operation and Development. Its secretary-general, Angel Gurría, warned of “major consequences for the UK itself, the EU and the international community”.
In a febrile world, policymakers could be forgiven for not knowing which fire they will be putting out next.
In China, relied on in recent times as the main engine of global growth, the pace of expansion has slowed and the economy is still struggling to rebalance. With or without Brexit, China’s difficult transition was always seen as a global risk. Now the fear is that Britain’s departure from the EU will intensify problems for the world’s second-biggest economy, which has invested heavily in the UK in recent years.
In Brazil, not so long ago seen as another potential draw for international investors, a credit crunch and the worst recession for eight decades has sparked a wave of bankruptcies. While trade links with the UK are small, the South American country’s currency and stock market were under pressure on Friday on fears that Brexit could knock confidence in emerging economies – especially those like Brazil with hefty current account deficits.
The world’s biggest economy, the US, is not immune from any of this either. Markets are already jittery in advance of November’s presidential election, which could potentially result in a change for America so momentous it would rival Brexit for headlines and global soul-searching. Indeed, the parallels were not lost on presidential candidate Donald Trump, who described the UK’s referendum result as a “great” development.
The risk that Brexit will worsen the global economic slowdown and cause an extended period of volatility on global markets adds a new uncertainty to the US outlook. With the horizon so clouded, markets have shifted to reflect radically reduced chances of the Federal Reserve raising interest rates again this year.
As Greenspan says, the global economy is in “real serious trouble”. In such a world, Brexit brings additional challenges.
The UK’s historic decision to split from the European Union risks stoking those global fires and, just as importantly, risks exhausting the energies and capacities of policymakers at a time when they can least afford it.
We hoped energy giants would be reformed. How naive we were
Not just a good day but a brilliant day to bury bad news. The Competition and Markets Authority (CMA) has spent the past two years studying the much-criticised energy markets and chose to publish its “do-nothing” findings on Friday.
It was a deeply suspect decision to pick the same date as the result of the UK’s most serious constitutional question for 40 years, but then the move was fitting in many respects.
The “big six” suppliers have always believed the competition authorities had been dragged into a cynical exercise geared to take the political crisis of rising consumer bills off the government’s hands and carry it safely into the long grass of regulation.
Equally, consumer groups always feared the CMA was unlikely to crack down on profiteering by the big six, which can mobilise armies of advisers to run rings around regulators such as Ofgem and now the CMA, which has little understanding of the sector.
So early expectations 24 months ago that excessive profits would be halted, vertical integration of wholesale and retail interests dismantled, and all domestic energy bills capped have been dashed. In their place the CMA has come up with 30 recommendations, none of which amount to more than tinkering around the edges: temporary price caps for those on prepayment meters and a database to make it easier for rival suppliers to approach existing customers, for example.
Even one of its own senior panel members, Martin Cave, found the CMA’s inaction unforgivable and insisted on having his objections noted.
He wanted a price cap across the whole sector, given that his colleagues have admitted it is the 70% of loyal, often long-term, customers on standard variable tariffs that are overpaying most.
Many of the new breed of independent suppliers expressed their horror at the missed opportunity to properly reform the market but the scale of the CMA’s inaction has been partly obscured by falling commodity prices.
Lower bills currently mean consumers are less affected by fuel poverty issues: but just wait till wholesale power costs rise and retail bills go with them. Then public anger will reappear and the CMA’s failure will be laid bare.
Tesco has made some good calls, but must play less golf
Giraffe restaurants, Harris + Hoole coffee shops and Dobbies garden centres. These were the brands that former Tesco boss Philip Clarke believed could attract shoppers back into the company’s supermarkets. They didn’t, and now Clarke’s replacement Dave Lewis has sold them off.
With hindsight, messing around with coffee shops and restaurants showed how far off the mark Tesco was with customers under Clarke, who left in 2014. Tesco’s real problem was that its products were too expensive and not of sufficient quality.
The growth in Tesco’s sales in the last two quarters shows that it is fixing this, but there is still a lot of work to do for Britain’s biggest retailer.
For example, the revelations that the boss of Tesco Bank spent more than £18,000 on taxis in just eight months, and that Tesco had a £10,000-a-year membership at Wentworth golf club in Surrey, show that the company still needs to make more cutbacks.