100 Days Post Brexit Referendum – How much smarter are we?
Saturday 1 October marked the 100th day since the result of the UK referendum to leave the European Union became known. And it seems neither the British nor their European neighbours have fully come to terms with the idea of a European Union without the UK.
Yes, all continental Europeans love British eccentricity: driving “on the wrong side of the road”, cherishing the royals and enjoying mince pies – although they’ll never quite understand what fascinates the British about cricket. In fact, it seems – thanks to social media and the internet – British brands like David Beckham, Lewis Hamilton and Sir Richard Branson, as well the hugely successful 2012 Olympic Games, have reinforced “Cool Britannia” and brought Britain closer to the living rooms of continental Europe than it has ever been before.
But all this doesn’t mean that Europe understands – or forgives – the UK for Brexit.
So, 100 days after the referendum, it’s a good time to reflect and to look back and ask: what do we know now that we did not know when voting on 23 June?
Googling Brexit comes up with an astonishing 121 million hits, more than twice as many as David Beckham (but considerably fewer than Adele). Brexit is certainly one of the words of 2016. By the end of the year, it will have produced more media attention and spawned more seminars, workshops and roundtables than any other topic. Speculation on the ultimate outcome of Brexit is rife in boardrooms, pubs, cafés and homes across Britain, Europe and beyond.
And we still haven’t seen the start of the negotiations. Article 50 will be triggered by March 2017 according to an announcement by Prime Minister Theresa May at this year’s Conservative Party Conference, meaning that the UK would be leaving the EU by summer 2019 at the earliest.
As a professional working with financial institutions in the City of London and abroad, the over-arching question for me is: will British companies maintain access to the single market through passporting arrangements? This question is closely linked to one of the key Brexit issues – border control and the flow of people across the EU. Free movement of people appears to become the condition sine qua non to access the single market in all comments from continental European politicians. However, as she confirms the repeal of the 1972 European Communities Act, Theresa May appears to be suggesting that there would be no deal on immigration to keep the UK in the single market.
Is there a solution on the horizon? It is vain to speculate about probabilities. Brexit will require a transition period and that transition period could well exceed the two years stipulated in Article 50. A lot of things can happen in three to five years: the German and French Governments have to handle increasing pressure to deal with immigration questions, exacerbated by terror attacks in Paris and Nice; in Italy a referendum is due in December, though with a different agenda, its banking sector finding itself in dire condition; Greece is economically far from out of the woods; Eastern Europe has a banking sector which isn’t shining; and the failed coup d’état in Turkey may have put its member of the EU further away. This all makes for a perfect storm which may lead to rethinking of major policies. As I say, five years is a long time.
It’s probably easier to identify a few hard facts away from the political wrangling:
– The markets are reacting to a new fear of “hard” Brexit with recent UK government pronouncements that it’s highly unlikely that the UK will stay in the single market, opting instead to become an independent member of the World Trade Organisation. Maybe this is only a tough negotiating position but, as Simon Smith, chief economist at FxPro notes “the issue is that [a hard Brexit] creates a greater hurdle for businesses to overcome and also the ability of UK firms to passport business into the EU also looks under threat,” It’s hit sterling badly – for the third quarter (which started just a few days after the referendum), the pound is on track for a 2.3% drop against the dollar and a 3.2% slide against the euro. The resulting £20bn boost to UK exports due to the devaluation doesn’t bring me much cheer.
– Almost 5,550 UK-registered financial firms rely on passports to carry out business in other EU countries, according to data from the Financial Conduct Authority that brings into sharp relief the importance of access to the single market to the City. A further 8,008 financial companies from either the EU or the European Economic Area depend on passports to access the UK. How will a “hard” Brexit affect these companies – and the UK economy?
– The Bank of England’s Monetary Policy Committee (MPC) has noted that “recent surveys of business activity, confidence and optimism suggest that the United Kingdom is likely to see little growth in GDP in the second half of this year.” In early August it voted for a package of measures designed to provide additional support to growth, including a 25 basis point cut in the Bank Rate to 0.25%. They also released plans to pump an additional £60bn in electronic cash into the economy to buy government bonds, extending the existing quantitative easing (QE) programme to £435bn in total.
– The IMF has a grim view of the post-Brexit world economy: “The global outlook for 2016-17 has worsened, despite the better-than-expected performance in early 2016. This deterioration reflects the expected macroeconomic consequences of a sizable increase in uncertainty, including on the political front. This uncertainty is projected to take a toll on confidence and investment, including through its repercussions on financial conditions and market sentiment more generally”. The OECB is no cheerier with their view that“a low-growth trap has taken root, as poor growth expectations further depress trade, investment, productivity and wages.” Brexit isn’t the only cause, of course, but the uncertainty it has brought makes it a principal culprit.
– According to data from the Nationwide Building Society, house price growth has strengthened since the Brexit vote— its index increased by 0.5pc month-to-month in July and 0.6pc in August, compared to average increases of 0.4pc in the first six months of 2016. But this resilience isn’t expected to last.
So how much smarter are we? Well, not much perhaps. It’s hard not to feel things are looking increasing gloomy. But who knows? Economies are fragile but they’re also resilient. And it’s probably best for companies to focus on what they can control – their own strategies – rather than be fixated on what’s outside their ability to influence.
And so finally to an unashamedly brazen plug for an event! I’m delighted to be involved in a 100 days post-EU Referendum discussion looking at how financial services companies are preparing for the future. At an event on 20 October in the heart of the City, speakers from leading insurance and banking organisations will discuss the impact on currency trading, regulation and passporting, the shape of the EU and resourcing in the City and mobile staffing issues. Interested? More here.
Global Financial Institutions Group Leader
The methodology for an exercise to assess the resilience of EU banks to adverse market conditions and test the state of their capital allocations has...