Andrew Benito, whose career to date includes working at the Bank of England, Banco de España, the IMF and Goldman Sachs – after having completed his M.Sc. and Ph.D in Economics at Warwick – spent an afternoon with The Review and WFS. He offered his views on a changing European macroeconomic landscape.
In his talk for WFS, Andrew gave a fascinating insight into his career trajectory which had spanned the official sector and the private sector. Through his work as an academic economist as well as by working in the official sector at central banks and the IMF, Andrew had published around a dozen academic journal publications on a range of research topics. He then moved into the private sector as an MD and Chief UK Economist at Goldman Sachs. In his interview with The Review, Andrew discussed a range of macroeconomic policy issues as well as challenges facing the financial services sector.
First addressing the pre-eminent issue of our day for the UK, Andrew acknowledged that Brexit was a political decision that chose additional national sovereignty at the expense of some traditional economic effects. Consistent with most of the evidence, he argued that Brexit would complicate the UK’s international trade linkages with its largest trading partner. A weaker value for Sterling was the foreign exchange market’s attempt to value that long-term impact; and in the process the weaker level of Sterling converted a discrete future change in to a smoother erosion of living standards. Time would tell whether new trade deals would compensate for these effects, although the evidence generally suggested this would be difficult, consistent with the foreign exchange market reaction thus far. Andrew highlighted that in the near-term, elevated uncertainty about the nature of the UK’s future relationship with the EU, and the risk of a ‘No Deal’ scenario, had weighed on UK spending and activity. It is difficult for businesses to plan investment and make changes to supply chains, or to relocate staff, or for staff to be certain of their rights to work and travel in certain areas, given such uncertainties. Not only do we not know what the final outcome of Brexit will be, it is difficult to attribute probabilities to any of these outcomes, making planning for the future incredibly difficult.
Moving on to address some of the root factors behind the Brexit vote, Andrew spoke of the importance of regional inequality in contributing to the UK’s decision to leave the EU. The gains from trade are partly gains from specialising in certain activities. And within the EU, the UK had specialised in some activities including financial services that had a strong regional dimension – benefiting London and the south east much more than other parts of the UK. Such activities may have played a special role in strengthening the value of Sterling (which may have crowded out manufacturing). Economists had, in general, neglected the regional aspects of the UK economy and the regional effects of globalisation including through the expansion of the EU Single Market. In our discussion, Andrew noted that voting Brexit had been an effective way of signalling that voters wanted fundamental change including looser fiscal policy – whether or not EU membership was a source of those grievances. Not only had Sterling weakened sharply on the Brexit vote but the outlook for fiscal policy had loosened significantly. A desire for a regionally better-balanced UK economy was now understood. From this perspective, voters have seen a number of the changes since the referendum campaign that have addressed their concerns. At least along these dimensions, they had not been duped.
A key theme of Andrew’s talk was his views on the future of macroeconomics and central bank policymaking. Noting that the world is set for low interest rates for the next decade or so, alongside persistently weak inflation, and amid low levels of market volatility, he discussed some of the issues faced by central banks. With all major central banks, including the BoE and ECB, continuing to have very large balance sheets as a result of unprecedented market interventions (including quantitative easing programs) Andrew argued that this led to a number of challenges for traditional central bank thinking. For example, central banks had developed novel ways of stimulating the economy in the low interest rate environment. But this involved central banks becoming a bigger source of ‘news’ that affected financial markets, whereas traditionally central banks wanted macro data, and not their own policy announcements, to be a source of news affecting financial markets. Markets now appeared to pay less attention to underlying macro data than they did to what central banks thought.
It was interesting to hear Andrew’s insights into what he saw as an increasingly close relationship between central banks and governments, with quantitative easing having created space for governments to be able to stimulate their economies (in the Euro area) or moderate the pace of fiscal austerity (in the UK). In the context of central banks being restricted by the zero lower bound and persistently low inflation, policy responses to future crises may require closer coordination of fiscal and monetary policy, and the use of monetary policy to finance fiscal intervention.
These insights made for a fascinating interview and subsequent talk, with Andrew providing a real insight into life in finance from someone with a background in Economics and academia. Those attending the talk left with a greatly improved understanding of the implications of macroeconomic changes in Europe for European political cohesion, Brexit and central bank policy as well as sound career advice for those looking to enter the financial services sector.