Wales' most innovative and influential think tank

Connect: Twitter Facebook LinkedInTel: 01685 350938

Dangers out at sea – Potential risks to the Welsh economy

September 17th 2018

A few weeks ago, Steffan Evans attended a visit by the Bank of England’s Financial Policy Committee in Cardiff. In this piece Steffan reflects on what he learned during the visit and sets out what Alex Brazier, the Executive Director for Financial Stability Strategy and Risk at the Bank thought were the greatest risks to the Welsh economy.

On the 30th of August, the Executive Director for Financial Stability Strategy and Risk at the Bank of England, Alex Brazier was vising Wales to gather more information about the performance of the Welsh economy and to share information with interested partners about the Bank’s work. Given their increasingly important role within the UK economy, the Bank of England are interested in engaging more with the third sector. It was for this reason that the Bevan Foundation was invited along to a briefing session, alongside other third sector organisations, through the Wales Council for Voluntary Action.

During an interesting and engaging session Brazier covered a number of issues. Of particular interest to myself, was the discussion on what he viewed as the greatest risks to the UK’s economy. Brazier’s role at the Bank of England is to ensure stability within the financial sector so that it serves the economy rather than sideswiping it as it did in 2008.

When looking back over a decade later it is easy to forget how devastating the 2008 crash was. 1 million people lost their jobs. A decade of slow economic growth means that each individual in the UK is thousands of pounds worse off than what they would have been had growth continued at the levels that we saw before the crash. Indeed, Brazier revealed that we came very close to seeing cashpoints run out of money.

He was very confident that the lessons learned in 2008 have made the banks far stronger. Amongst the key changes we have seen since then is more rigorous stress testing of banks, and a requirement for banks to use more of their own money when lending. But this doesn’t mean that there are no risks out there to the Welsh economy. In Brazier’s opinion there are four main risks to the economy. These are:

  • The performance of other economies and financial sectors globally
  • Brexit
  • Interest rates
  • Consumer lending

What is meant by each of these and why are they risks?

The performance of other economies and financial sectors globally

£6 in every £10 lent by British banks is lent overseas. Much of this money is lent to developing economies such as Turkey and Brazil. The Trump presidency, and his America First approach has slowed down growth in many of these countries. Any escalation in the ongoing trade war could have an impact on the ability of foreign states and businesses to repay their loans. With so much money invested in these countries from British banks the Bank of England is keeping a very close eye on the banks to ensure that any losses they’d incur from a slowdown in these countries wouldn’t pass on to the wider British economy. A slowdown in these economies could also have an impact on the Welsh economy more directly, with a weaker global economy meaning that there’s less demand for products developed by Welsh manufacturers.

Brexit

With such uncertainty with regards to what sort of settlement, if any, the UK will get when it leaves the EU, preparing for Brexit is a significant challenge for the Bank of England. They have therefore required all banks and financial institutions to demonstrate to them that they are robust enough to cope with a range of eventualities, including a significant economic slowdown. Some steps have already been taken in conjunction with the European Central Bank to ensure that financial services that are provided across borders continue to work after Brexit, to safeguard the broader economy.

Interest Rates

Whilst interest rates may be very low at present with no expectation for them to rise quickly, the Bank of England has not allowed lenders to plan for them to stay low. They have required banks to ensure that a mortgage applicant has sufficient funds for them to be able to continue to pay the mortgage, even at 7% interest rates. The reason for this is that, at times of financial hardship, people prioritise paying off the mortgage. This has negative consequences on the broader economy with people keeping their hands in their pockets.

Consumer Lending

At times of financial hardship, people may prioritise paying their mortgage debt over economic expenditure but the same is not true of consumer debt. With consumer lending accounting for approximately 10% of all bank lending in the UK any increase in the number of people who do not repay their debt would have an impact on banks finances. The Bank of England has therefore taken steps to make this less risky.

It was encouraging to hear that not only is the Bank of England working to prepare for these economic threats internally, but, that it is seeking to work with Welsh businesses and organisations so that they can minimise their own risk. By being aware of these dangers we can all work together to minimise the risks to the Welsh economy.

0

Leave a Reply

In Print

Supporter Magazine

Exchange Issue 12, Winter 2018

Wales’ best policy and politics magazine! The latest edition of Exchange, Wales’ best policy and politics magazine that is exclusively for supporters of the Bevan Foundation brings together a fantastic range of contributors that delve into some of the most Read more »

Exchange Issue 11, Summer 2018

The magazine with its finger on the pulse! The latest edition of our exclusive supporters’ magazine brings together a range of contributors to explore some of the most current and important issues in Welsh public life. New free extract for Read more »

More from the Supporter Magazine »

Other Publications

More from Other Publications »

Newsletter

Stay informed

Keep up to date and gain new insights and inspiration with Spark, our FREE e-news

Sign Up For The Spark »

Support Us

Support lasting solutions today!

We need YOUR help to create equality, justice and prosperity for everyone in Wales

Support Us »

Events

January 18th 2019

New Year Lunch

We’re delighted to hold another New Year lunch at Jol’s restaurant in Merthyr Tydfil. With a new First Minister, Brexit and the roll-out of Universal Credit, as well as being the 20th anniversary of devolution, we can promise there will Read more »