Macroscope | A new phenomenon is filling the vacuum left by the fading influence of central banks
The UK Brexit vote heralds the rise of political risk in setting investor perceptions towards markets and risk
On Wednesday, a survey by IHS Markit, the financial data provider, showed that output in Britain’s services industry - which accounts for nearly 80 per cent of the country’s economy - last month suffered its sharpest fall since March 2009, increasing “the chances of the UK sliding into at least a mild recession”, the report noted.
...domestic political developments are influencing international economic and market conditions to a much a greater extent
Coming on the heels of Monday’s publication of a separate survey showing that manufacturing activity in Britain shrank at its fastest pace in nearly four years, the bleak data on services sector output is the latest sign that economic growth in Britain - which was still holding up relatively well in the second quarter of this year - appears to have gone into reverse since the UK’s shock decision on June 23 to vote to leave the European Union (EU).
The sudden post-referendum deterioration in Britain’s economy is also the clearest example of how domestic political developments are influencing international economic and market conditions to a much a greater extent than was the case over the past several years.
Up until mid-2015 or so, central banks’ ultra-loose monetary policies were desensitising investors and traders to all sorts of country-specific risks.
But over the past year, and particularly since the beginning of 2016, the credibility and efficacy of these policies have been called into question, undermining central banks’ ability to stabilise markets and turning the world’s main monetary guardians (in particular the US Federal Reserve) into a major source of volatility.
The UK vote to exit the EU is a Rubicon-crossing moment in investor perceptions of political risk.
Not only has it occurred at a time when markets are losing confidence in central banks, it is having a detrimental impact on both investor sentiment and, more worryingly, economic activity.
