Brexit Watch – much ado about nothing?

27 September 2016

Good afternoon Everyone. 

As part of a regular series delivered from our UK based intermediary we look at the latest developments in respect of Brexit. Although not as sexy as Brad and Angelina’s divorce, the severing of links and ties between Britain and Europe promises to be challenging and is likely to run and run…

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Brexit Watch – much ado about nothing?

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Brexit Britain – is it really a new dawn?

On the 23rd June 2016 Britain voted by a margin of 52% to 48% to leave the European Union.Given that we are now nearing the end of September, readers of this blog might be surprised to find that we still don’t know what Brexit will actually entail in detail, nor do we have any clear indication what Britain’s path to Brexit will actually mean.

There aren’t any clues in the latest developments – at least in so far as they relate to key economic data and statistics. Not much has happened and not much is expected to happen for the rest of the year in respect of Brexit.

Much ado about nothing then?

The economy – little evidence that confidence has been dented

Prior to the June Brexit vote most economists predicted an immediate and severe negative shock on the UK economy in the event that the leave campaign secured victory.

At the time of writing of this blog entry there is little evidence that Brexit has had a negative impact at all, save for a persistent weakening of the pound against most major currencies.

Consumer Spending – a measure of confidence and the mood of the country?

Consumer spending has been rising for the past three years, and in July was up 5.9% on the figure recorded in July 2015. Overall, UK consumers made 168 million purchases on credit cards in July 2016, an amount that was higher than the number of transactions recorded in June, above the comparative figure for July 2015, and higher than the average of the previous six months.

The economy – a little case of exchange rate inflation

The consumer prices index rose by 0.6% in July. This moderate increase can be attributed to higher fuel prices as these are denominated on international markets in US dollars. The pound has weakened against most of the major currencies including the US dollar as a result of the Brexit vote (see below).

Britain’s Manufacturing continues to rebound

A recently released Markit/CIPS survey suggests that Britain’s manufacturing sector rebounded strongly in August. Underlining the data in this survey, the Office for National Statistics reported that Britain’s industrial output grew at its fastest rate for over 17 years in the period between April to June 2016.

Little impact on the rest of Europe?
There is evidence to suggest that the rest of Europe is quickly getting over the shock of the Brexit vote. According to the same Markit Survey, Eurozone economic activity reached its highest level in August (measured against the previous seven months).
Is Britain really gearing-up for Brexit?

David Cameron, who had led the campaign to remain, resigned the day after the referendum and has been replaced by Mrs. Theresa May as Prime Minister.

Mrs. May, who also supported the remain campaign, has said that Britain will not trigger Article 50 before 2017. Some have interpreted this to mean that the new PM continues to harbour reservations in respect of Brexit, but the new PM has gone on record a number of times to state that “Brexit means Brexit” and that the will of the majority must be respected. May has met some of the EU leaders including Germany’s Angela Merkel, and the French President Francois Hollande, but the formal negotiations on the UK departure from the EU have yet to start. For completeness, EU leaders have reiterated their original position that negotiations cannot start until Britain triggers Article 50 of the Lisbon Treaty.

Beyond this, Mrs. May’s new Cabinet includes “Brexiters” in key strategic positions. Boris Johnson currently holds office as Foreign Secretary, while David Davis has been appointed as Secretary of State for Brexit, and Liam Fox as the International Trade Secretary. All of these positions are key to a “Post-Brexit” future.

No clear definition or consensus on what Britain wants from Brexit

Mrs. May’s government have yet to set out in detail what the UK wants to achieve from the whole of the Brexit negotiation process. This is not surprising. There is little consensus in her government or the country for that matter. The path to Brexit is littered with hurdles, the largest being the issue of immigration. Many in Mrs. May’s administration want Britain to have total control over her borders, while others accept that continued access to Europe’s market would have to come at the cost of continued free movement of people from the rest of Europe into Britain.

Immigration remains a key sticking point that may continue to cause deep divisions in Mrs. May’s administration as well as the country as a whole. Ultimately immigration may prove to be the wall that simply cannot be scaled.

What has happened to interest rates?

The Bank of England’s approach to the Brexit vote strongly suggests that a plan had been designed by the Bank of England to deal with the expected impact of a leave vote. Accordingly, the Bank of England has cut interest rates from 0.5% to 0.25% (the first reduction in interest rates since 2009). Interest rates in the UK now stand at a record low.

The Bank of England has also announced a significant extension of its quantitative easing programme – the extension amounting to an additional £70 billion. A £100 billion scheme has also been announced to ensure that Bank’s pass on the low interest rates to households and businesses respectively.

The Pound has plunged and shows little inclination to recover lost ground
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The day after the referendum the pound plunged dramatically as did the stock market. While the stock market has recovered the same cannot be said for the pound.As a result of the economic uncertainty and concerns over Britain’s future relationship with the rest of Europe, as well as the impact of the Bank of England’s drop in interest rates, the pound continues to remain depressed measured against pre-Brexit vote levels.

At the time of writing of this blog entry the pound is now worth $1.30. A year ago it was worth $1.57, a fall in percentage terms of 17%.  Against the Euro the pound is now worth 1.17 euros. A year ago it was worth 1.35 euros. This represents a fall of 13%.

The rise of Hate Crime

According to data released by the Police reported hate crime (illegal acts perpetrated against a person based on their race or creed) rose 57% in the four days immediately following the referendum. In the period between the 16th and the 30th June 2016, 3,219 incidents of hate crime were reported to the Police. Measured against the same period in 2015, this represents a rise of 37%.

The impact on Trade

Britain has for many years run a trade deficit with the rest of the world and Europe. This means that annually Britain imports more goods than it exports. In the month of the referendum, Britain’s trade deficit widened to £5.1 billion with the level of imports hitting a new high.

The continued weakness of the pound may help Britain’s exporters to cut some of this deficit as the price of Britain’s exports will now be comparatively cheaper. But there is also the other side of the coin to look at. There is evidence of increased inflationary pressure as the price of imports (including imported raw materials) have risen. Data in respect of this should be released in October.

The position in respect of employment

In the run-up to the referendum UK unemployment fell by 52,000 to 1.64 million. This represents an unemployment level of 4.9%. New data will not be available until October so it is difficult to assess the impact of the vote on jobs.

Although the Market survey mentioned above suggested that the jobs market suffered a dramatic slowdown in July as a result of the Brexit vote, when we look at announcements from some of the larger employers the position is mixed.

One of Britain’s largest banks, Lloyds, has accelerated planned job cuts releasing another 3,000 positions. Offsetting this, Japans SoftBank is in the process of acquiring the UK smartphone microchip manufacturer ARM Holdings for £24 billion, and its transition plan for post-acquisition involves the creation of additional positions that would double the workforce from its existing level of 4,000 people. In addition, the pharmaceutical company GlaxoSmithKline is investing an additional £275 million in the UK, while the fast food brand McDonalds has announced plans that would involve the creation of an additional 5,000 jobs.

Not all prospective employers are deterred by Brexit.

The world has not ended – so far

The fall in value of the pound and rise in hate crime aside, there is little evidence to suggest that Britain has so far been negatively impacted by the Brexit vote. This is perhaps not surprising as the formal process of leaving – the triggering of Article 50 – has not started. As the months unfold this may change. Suffice to say that so far the world has not ended, but we do live in the most challenging of times.

Closing thoughts – time to consider your investing strategies
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