The great British economic rollercoaster (and how to derail it)

Source: Credit Suisse & Business Insider

The two main challenges facing the UK economy at the start of 2017 are the much trumped-up uncertainties of Brexit and the imminent interest-rate divergence across the rich world. The intricacies and complexities of the Brexit process have the potential to upend quite a few givens in the well-oiled machine of the British economy and create many uncertainties as to the role of the United Kingdom in the wider European and world economies. The main talking points have been waning investor confidence, threatened export potential (somewhat alleviated by the commitment of behemoths Nissan and Google to expanding their activities in the UK), and the value of the British pound.

Bank angles and centrifugal forces

A dilemma that the Bank of England, which has been a favourite punching bag for populists and political opportunists of all kinds and political spectra might have to face in the coming months is whether to increase its base interest rate to defend the pound and prevent inflation at the price of pushing the economy towards recession, or to keep rates low and let inflation run its course and even cross the hallowed 2% per annum.  For now, the indications given by Mark Carney is that the Bank is not ready to endanger the carefully nurtured recovery of the British economy in the name pushing down inflation, whose stubborn bottom-scratching has been the main source of headaches for central bankers in the past decade.

Whilst China was considered the main risk for the world economy at the beginning of 2016, as its slowing economy and bubbly property markets were causing concerns of an imminent meltdown, investors have largely been assuaged that the Chinese government still has the capacity and the willingness to defend the status quo. Major risks have thus shifted from emerging markets to the big Trumpian and Brexitarian question marks in the West. The dangers lingering in the background are the French, German, and Italian elections looming in 2017, which in a worst-case scenario can see Italy and France staging a referendum to leave the Eurozone, which could spell its collapse, with tectonic consequences for European economies. They, just like Britain, will find out that tying the knot is much easier than untying it.

The rich are getting richer and the rich are getting poorer

The second main challenge is related to the divergence in the recovery dynamics of rich-world economies in the aftermath of the Great Recession. The US economy, thanks in part to the decisive actions of the Obama administration and the monetary weight-lifting of the Federal Reserve, has performed well, created jobs, and exhibited rude growth rates in the interval of 2% to 3% per annum. This has warranted the recent decision of the Federal Reserve to restart the gradual process of monetary tightening, begun at the end of 2015 but delayed by perceived market turmoil.  Whilst the UK had for some time been exhibiting similar robustness, Brexit has the potential to jeopardise that and lay bare structural weaknesses such as the abysmal growth of productivity in recent years and high private-sector indebtedness. The Eurozone and Japan, the traditional anaemic patients, have forced their central banks to stay the course of low-interest rates and experiment with unprecedented instruments designed to lift demand out of its almost chronic torpor.


Source: The Brookings Institute

This divergence in recovery trends might cause instability in the global financial system as the dollar strengthens against other currencies despite the substantial current account deficit of the US. In those conditions, the role of the Bank of England, the European Central Bank, and the Bank of Japan might be constrained by the requirement to protect their ward economies against inflation without knocking out the still fragile patient into a new recession. The compromise between preventing another slump and keeping prices at bay will be finer than ever.

Donald Trump’s Economic Policy Agenda, or Can You Stimulate by Protecting?




The American elections were supposed to decrease uncertainty and allow markets to put one of the nastiest and most polarising election seasons in living memory behind. Donald Trump’s victory, which became an irrefutable fact by 6am GMT on November 9th, has all but made that uncertainty chronic. Trump’s economic plan, with its rather haphazard pre-election sketch, is more of a wishlist than a detailed economic policy roadmap. However, putting meat on the bones of the plan will be a key part of the transition period until Trump’s inauguration and could either herald an economic renaissance, or transpire into a terrible disappointment.

The Donald and the past

Throughout his campaign, Trump has taken the position that the economic policies of the Obama administration had failed in bringing about the Promised Land of recovery. Whilst achieving a growth rate of 1.5%-2% after the most severe economic crisis since the Great Depression is no small feat, for Trump and his advisors this is not nearly good enough. US policymakers and the Obama administration have followed the monetarist dictum of decreasing the budget deficit and using monetary policy tools to reflate the economy. Donald Trump has criticised the independent Federal Reserve, voicing the views of many hawkish conservative analysts who believe low interest rates distort incentives, inflate bubbles in non-productive asset markets, and punish frugality by diminishing returns on savings. Whilst it is highly unlikely that Janet Yellen, the current governor of the Fed, will leave before her term ends in 2018, Trump might try to replace her with a more hawkish policymaker who might be willing to risk a recession but return monetary policy to normality.

The trump card

Trump’s strongest economic idea seem to be his proposal of massive new spending on infrasstructure projects, coupled with a sbstantial decrease in corporate taxation. The United States have for years been suffering from chronic underinvestment in infrastructure, a problem that has long been recognised but not resolved by presidential administration, including that of Obama which was forced to work with an uncooperative Senate.

Apart from infrastructure spending, Trump has promised tax cuts for individuals and a decrease of corporate taxes from 35% to only 15%. He has also promised to cut red tape, especially post-crisis legislation such as the Dodd-Frank Act, that according to him are chasing businesses away from the US and stalling job creation.

Economists have been anxious that Trump’s spending stimulus and tax cuts would increase the national debt by more than $5 trillion, whilst pushing up inflation. Indeed, GDP growth figures of 4% to 5%, which Trump has promised as an answer to the supposedly negative comparison with China, which is growing at more than 6%, could not realistically be achieved without the government’s helping hand, whose borrowing will almost certainly stoke inflation. Whilst the Fed can act to parry inflation by hiking up interests rate, the chronic issue of the America public debt will only be exacerbated. If Trump’s rhetoric on China translates into similarly-minded policies, a trade war with China could be sparked, which will affect the American economy’s growth in the medium term.

Paving the road to hell

Trump’s economic success crucially depends on the assumption that his expansionary fiscal policies will spark growth which will be sufficient to increase the tax base and not necessitate any extreme levels of borrowing.

Markets initially reacted with shock and dismay as news of  Trump’s win circed the globe. However, given the chance to digest Trump’s policies with the hope that the most etxreme ones will be checked by a mature and experienced team of advisors, the US stock market recovered, reaching an all-time high on November 9th. Copper prices, which is used as a benchmark by many investors for its predictive abilities, incresed by as much as 3 percent.

Make the world small again

Although Trump’s impact on the American economy could be viewed with cautious optimism, his impact on developing markets and trade is highly uncertain and hinges critically upon the extent to which Trump’s policy will match his protectionist rhetoric. In an ominous sign of what lies ahead, the Mexican peso tumbled by 15% the morning after the election. Oil prices fell to a monthly low on the same day, reflecting fears about global demand spurred by hypothetical American’s protectionism.

Donald Trump comes to the Presidency with the profound chance and opportunity to upend the secular stagnation trends reigning supreme since the Great Recession. However, it seems that success can only come by very narrowly avoiding stagflation, trade wars, a new setback to globalisation that has already been battered by Brexit, the travails of the Eurozone, Russian sanctions, and the politcal backlash against liberalism.

Why is Marshall Ideas being launched?

Marshall Ideas is a new blog that will be open to all university students worldwide in association of the Marshall Society, the official economics society of the University of Cambridge. Hopefully, it will be of particular interest to those who have an interest in economics and finance.

As to why this blog is being launched, here are a couple of the reasons.

To serve the undergraduate population: Being an economics undergraduate at the University of Cambridge, I am well-aware of the difficulty in keeping on top of everything; with academic work, social life and commitments to societies all being in the forefront of my mind, I had little time to keep up-to-date with the ever-changing economic conditions in the world. This blog should act as the solution to that problem by providing a one-stop-shop for that information.

To encourage engagement with the Marshall Society. As the official economics society of the University of Cambridge, the Marshall Society is a great society to be involved with and we wish to open up the blog as a way to do this. For example, the Marshall Society holds several events per term, with well-respected economists having been invited in the past. Importantly, this blog will seek to facilitate these events by providing background information on the topic on hand to those who are interested in attending the event or wish to read further on the topic having attended the event.

To create a forum for Cambridge students to discuss issues in economics. At present, no platform currently exists whereby economics students can discuss issues in economics openly and we think that Marshall Ideas would be the prime place for these students to apply their knowledge to critically debate contemporary economic issues by either contributing an article to the blog directly or commenting on the articles themselves.

As the blog evolves over time, its purpose will inevitably change but for the time being, this well and truly outlines our current intentions.  In the mean time, be sure to have a look at our contributions section to get involved and follow us on TwitterFacebook or via email for updates.