Weekly Risk Outlook

Weekly Risk Outlook

Brexit debate begins. IMF delivers economic outlook. Bank of England sets rates. Democratic candidates debate. China figures highlight slowing. All in the Weekly Risk Outlook.

Brexit debate kicks into high gear as official campaign begins

Although the official start date for the EU referendum campaign is Friday, both the In and Out campaigns will have key developments in the days preceding the campaign.

Today, Chancellor of the Exchequer George Osborne will release the UK Treasury’s analysis of the benefits and risks of Britain’s continued membership in the EU.

The report will likely be used as a key starting point for the In campaigners looking to present an organized an comprehensive case ahead of the June 23 vote.

On the Out side, the UK Electoral Commission will name the lead campaigner in favor of Brexit among the competing groups by Thursday. The two that appear to have the best shot of getting the designation (and the public funding and broadcast time that comes as a result) are Vote Leave and Grassroots Out (Leave.EU, which has frequently clashed with Vote Leave, is also seeking the lead campaigner designation).

Vote Leave has claimed the support of major political figures like Michael Gove and Theresa Villiers, while Grassroots Out has claimed support for their group is widespread and exists across the UK, touting 2.7 million supporters.

The group that receives the Electoral Commission designation could have subtle (but important) effects on the campaign, in addition to the more tangible public funding and broadcasting shifts.

Principally, the selection of the lead campaigner could affect both the overarching messaging as well as tone of the Out campaign (and subsequent response of the In campaign). A Vote Leave-guided campaign would likely hew as closely to political moderation as possible, highlighting cross-party support and arguments regarding the costs of membership and reduced policy control.

A Grassroots Out-led campaign, which has been criticized for its strong UKIP connections, could wade more heavily into controversial issues like immigration and the Syrian refugee crisis.

One as yet unanswered question is which of these strategies is likely to be successful in convincing British voters to support the Out campaign — whether employing the strategy of ultimately playing to the base or trying to convince the undecideds could have a significant impact on the June 23 outcome.


IMF delivers economic outlook ahead of IMF-World Bank spring session

On Tuesday, the International Monetary Fund will deliver its World Economic Outlook. The IMF has repeatedly downgraded recent estimates for global growth, particularly due to concerns that China’s falling growth levels and Brazil’s significant economic downturn could have large effects on the global economy.

The upcoming World Economic Outlook would represent the first comprehensive global economic growth forecast to include the recent rise in oil prices (which has helped to place upward pressure on inflation as well as lift, however slightly, the economic prospects of key energy exporting countries).

This will be followed on Friday with the IMF and World Bank’s annual spring meeting, which will be focused on the global economy and financial markets. The combination of an increasingly dire political and economic environment in Brazil is likely to get a share of attention from the IMF/World Bank meeting, as well as the current pressures on the EU economy (the Syrian refugee situation, Brexit, the rise of populist movements across the continent).


Bank of England sets interest rates as political and economic challenges mount

On Thursday, the BoE will set interest rates for April, with many economists expecting the Bank to maintain the rate it has held since 2010 of 0.5%.

However, the Bank is also likely to be increasingly concerned with a recent wave of bad economic and political news. Last month, the central banks of Sweden, Japan, and the European Central Bank either lowered their rates to zero or pushed them further into negative territory.

Additionally, both British consumer confidence and the manufacturing sector have fallen in recent weeks. Last week’s announcement of the bankruptcy of Tata Steel, Europe’s second-largest steel producer and a key British metals manufacturer, has only added to the perception of industrial decline (though some have argued that the UK government’s own policy may have contributed to this decline).

Additionally, the June 23 Brexit vote has created significant market concerns due to the large uncertainties that would result from an Out vote. Somewhat similar to the few weeks leading up to the Scottish independence referendum that showed a close vote would be likely, the possibility of a major market-altering change in policy is expected to roil financial markets and could mar the UK’s short and possibly medium term economic outlook.

Whether or not this has a decisive impact on the BoE’s policy remains to be seen, but is likely to be discussed (somewhat similar to the Fed’s consideration of major global economic developments when determining its rate hike decisions for 2016).


Democratic Presidential candidates debate as contest centers on New York

On Thursday, Democratic candidates Secretary Hillary Clinton and Senator Bernie Sanders will debate in the last head-to-head matchup before the April 19 New York primary.

This primary will be important for the Democratic primary race for three reasons: 1) both candidates can claim a close connection to the state (Secretary Clinton served as a New York senator for 8 years, Senator Sanders was born and raised in Brooklyn); 2) a win for the Sanders campaign could build on a string of victories his campaign recently won to more adequately claim momentum; and 3) the sheer size of the New York pledged delegate count (247 delegates, more than the last 5 states combined) could significantly contribute to either campaign if it pulls off a large victory.

The campaign between the two has grown increasingly testy in recent weeks as both move to try to sway voters in the delegate-rich state.

Secretary Clinton has grown increasingly frustrated with commentary from the Sanders campaign regarding her alleged ties to the energy and banking industries, while Senator Sanders has grown frustrated with commentary regarding his electability and remarked that Secretary Clinton was “unqualified” to be president (which he has since reversed amid significant criticism).

This debate will represent an opportunity for both campaigns to either further escalate divisions between the two camps, or de-escalate rhetoric looking beyond the primary to the general election.

Given the way the vast majority of the Democratic campaign has unfolded, and with Senator Sanders’ recent backtracking as a good indicator, it appears likely the campaigns will shift back to issues-based discussions and commentary.

In addition, both candidates have made overtures to ensure party unity will be maintained following the primary convention; Secretary Clinton said she would pick Senator Sanders over either Donald Trump or Senator Cruz any day of the week, and Senator Sanders noted that Secretary Clinton would be an infinitely better candidate than any Republican running.


China growth figures will highlight a slowing economy

On Friday, China will release GDP growth figures for the first quarter of 2016. This will also be the day that March industrial output, retail sales and fixed asset investment figures are released.

One of the big questions over the slowing economy is what the government’s response will be.

China experts appear somewhat divided, for example, over what role stimulus will play in China’s attempt to fill the growth gap. Some have argued that since a number of the major stimulus measures in past to build up manufacturing and housing infrastructure have contributed to current overcapacity and numerous market bubbles (which could create labor pressure in the event of layoffs) that the government would back away from stimulus measures.

Indeed, the government and central bank have both signaled that engaging in earlier stimulus-led mega-projects will not come around this time. But it has also seemed unwilling to take the painful steps in layoffs and restructuring to reform the economy and encourage more stable and consistent growth in more advanced industries.

In the event that strong government intervention is not taken to lift the economy and the government doesn’t take the steps to reduce inefficiencies and over-capacities, it appears likely growth will continue to perform below expectations.


The GRI Weekly Risk Outlook (WRO) provides analytical foresight on the economic consequences of upcoming political developments. Covering a number of future occurrences across the globe, the WRO presents a series of potential upside/downside risks, shedding light on how political decisions affect economic outcomes.

This Weekly Risk Outlook was written by GRI analyst Brian Daigle.

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