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Boris's Empire Song Sinks Beneath Market Waves

Boris's Empire Song Sinks Beneath Market Waves

Monday, 7 September, 2020 - 05:30

Britain has moved on from the Brexit debate. One of the passionate political arguments at present is over the songs that should be sung on the Last Night of the Proms, an annual opportunity to wave union jacks and be patriotic. At least two of the songs, from the Victorian era, are a little problematic these days.

“Rule Britannia” applauds that “Britannia rules the waves” and that Britons “never never never shall be slaves.” Viewed from the US, these words raise the issue that a lot of the people carried by Britons over the waves during the imperial era were, indeed, slaves. Then “Land of Hope and Glory” is addressed to the empire itself: “Wider still and wider, shall thy bounds be set, God who made thee mighty, make thee mightier yet.”

You can be proud to be British while still finding these lyrics deeply embarrassing. (I happen to know them by heart as I had to sing them in my days as a chorister. I enjoyed it but found the words uncomfortable then and even more so now.) After the BBC, which runs the Proms, said that it would nix the words to Rule Britannia, the prime minister, Boris Johnson, got involved, telling the BBC not to be “wet” and instructing schools it was “politically acceptable” to sing about an ever wider, God-created empire that rules the waves.

I mention this tempest in a British tea-cup because markets are putting Brexit, and the UK’s post-imperial destiny, back into a harsh light. The FTSE-100 sold off badly Tuesday, and is now back below its level on June 24, 2016, the day of the Brexit referendum. As the chart shows, British stocks are slipping ever further behind the rest of the world. The gap is getting wider still and wider

British stocks are doing so badly in large part because the pound is doing so well. The FTSE-100 is dominated by multinational companies, whose profits look much better when the pound is weak. But the latest round of dollar weakness has brought the pound to its strongest against the US currency since early 2018, months before the bid to win parliamentary approval for Brexit degenerated into crisis.

A strong pound may not be helpful as Britain tries to work out what a future outside the EU will look like, in a world where the two biggest economic powers, the US and China, are at loggerheads. There is a danger that the UK could turn into one of the biggest global losers from a weaker dollar.

For the time being however, the plan for the British economy seems very similar to the one used by David Cameron and his chancellor, George Osborne, in the years before the disastrously miscalculated Brexit referendum terminated their political careers. That policy revolved around juicing the housing market, which has long been a driver of the British economy, while maintaining fiscal orthodoxy.

The latest mortgage approval data came out on Tuesday, and they show that demand for housing has completed a remarkable V-shaped recovery.

How has this been achieved? Chris Watling of Longview Economics in London provides charts to show that easy money and the housing market have a lot to do with it. Taking into account the efforts the Bank of England has made with asset purchases, British interest rates have never been lower.

For some reason, Britons still tend to prefer floating rate mortgages. (There is an interesting psychological thesis to be written on why they perceive it as being more risky to take a fixed rate, and miss out on the possibility that the rate will go down, while most others tend to perceive a fixed rate as less risky.) The average floating rate for mortgages is also now at an all-time low.

This in turn has predictable effects on consumer behavior. Brits are used to treating their home as an ATM, and so house price appreciation leads to greater demand for consumer credit. As Watling shows, that appears already to be happening.

Easy money does, therefore, seem to be coursing effectively through the system. That has helped ensure that the wind is also set fair for British industry (whose fortunes tend not to be reflected in the FTSE-100 because it is dominated by multinationals). The UK’s manufacturing PMI continues to improve, and is now back to levels last seen early last year. It does no harm at all to be doing better than the euro zone.

Now the problems arise. The government has so far been mighty generous, with direct subsidies for eating out at restaurants on top of very generous income substitution for those rendered idle by Covid-19. That will need to be paid for, and the chancellor, Rishi Sunak, is now in a deepening debate over whether to raise taxes, and if so how. Tax rises will always be unpopular, and would run the risk of cooling off the economy in the same way that sales taxes blunted Abenomics in Japan. The alternative would be Osborne-style austerity, which was unpopular the first time, and would probably be more so now coming after a period of generosity which is due to end suddenly. But if Sunak doesn’t do something about this, it will be hard to keep rates as low as they are now.


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