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Blythe Financial Leaders in Wealth Management

       

Butterflies without wings are all deaf…

…it doesn’t matter how loudly you tell them to fly, they just don’t.

This is a great example of false correlation and anyone who has studied statistics or psychology knows that correlation does not (necessarily) equal causation.

As we await the Bank of England pronouncements today it is worth considering whether or not there are false correlations being made by the media, economists and markets where they are linking the poor PMI, services sector data and construction sector data to a decline in the economy caused by Brexit.

This data is held out as examples of the recessionary trend that Brexit has caused and whilst the correlation between the data and the event that was Brexit is strong I think that it is too simplistic to draw the conclusion that Brexit is recessionary.

My own thought is that the slowdown can be explained by a pause in major financial decisions by almost everyone in UK whilst they try to understand the impact of Brexit. To that extent Brexit does represent the causation but I believe that the favoured conclusion from the correlation is not correct.

If businesses and consumers “press play” again then there is no reason that the economy should fall into recession – the world has not stopped turning since Brexit and for the first time in the best part of a decade we are actually seeing positive GDP growth in most of the world, unemployment is falling around the globe and world is generally in better shape than it was.

The danger of course is that the correlation that I refer to could become a self-fulfilling prophecy. If we remain “on pause” for too long then the correlation between Brexit and recession becomes inevitable.

For these reasons the Bank of England should not make any decisions about interest rates (what’s the benefit of cutting rates from not a lot to near to nothing anyway?) or Quantitative Easing (does it work anyway?) today and a better policy would be to wait and see whether the data improves in the next few weeks as we all get over the initial shock of Brexit.

 

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