Post Brexit Blues

While in the UK last week, on vacation with friends, I was lambasted by groups that were in the ‘remain’ as well as ‘leave’ camps. I myself had started as a ‘remain’ back in the early spring, but a week in London in March changed all that, after talking with many including some business people from Italy and Austria.  But the news from the UK is now jaundiced and suggesting difficult times ahead. The pound has suffered hugely since the Brexit vote, sinking to 30-year low against the dollar. It has gone from about $1.46 just before the vote to now $1.30.  I wrote this blog on the flight home to the US, landing to find that the pound had dropped again to $1.28.

The FTSE also took a big hit but it has since recovered. The bad news is that, according to reports, some business actions and conditions are changing even before the UK government starts the official application to exit the EU. Some banks are talking of moving headquarter staff to mainland Europe. More troubling some insurance and construction firms are already changing behavior. In Tuesday’s UK print edition of the Daily Telegraph, there was an article, “Standard Life Halts Trading at Property Fund after Exit Rush“. The report explores the impact of massive withdrawals from property investment portfolios. In summary, long term investment strategies related to construction in the UK are suffering a lack of confidence. 

Economically the UK is in a strong position. It does not suffer from as many of mainland Europe’s issues. It is even now at liberty to remove other EU restrictions and after Brexit is complete, it no longer will be held back in setting policy by 27 other independent groups.  But confidence is the issue here, along with ignorance. There is little material that really proves the UK economy will be worse off as a result of Brexit. Another story in the same print edition of the Day Telegraph reports that the German finance minster (Wolfgang Schäuble) was asked by David Cameron to weigh in on the Brexit ‘remain’ vote with comments emphasizing economic disruption. The press had thought the such comments were based on fact independently developed and facial: they were not.  

On a hugely positive note two other articles highlight really interesting points. One (see Never mind Brexit, real hope is in UKs soaring company start-up rate) suggests that the number of start-ups is running at historically high levels. This is a little known analytic that suggests that economic renewal is improving and this operates as a future driver for growth. Alas the same analytic in the US is in the doldrums and government policy is not targeting to improve this goal.

At the same time a report by S&P addresses (see Weaker pound to cushion the shocks of Brexit, predicts S&P) some of the pointless scaremongering that was created during the run-up to the vote.  The new article projects solid economic growth and a safe passage for the UK economy post Brexit, assuming a calm, rational set of trade and economic actions.  Finally some sensible reporting; no ‘end of the road’ reports now. It is just a matter of time before more of such reports are understood.

The U.K. print edition of the Financial Times offered some other interesting angles too. Some the ‘Remain’ camp won’t find all that comforting. Firstly in, “German employers warn against ‘punishing’ the UK“, the head of Germany’s employers body BDI was reported as saying that negotiations regarding trade between the EU and the UK should not penalize the UK. This is sage advice given that the UK is Germany’s largest export market behind the US and France. Equally Germany is the UKs largest export martlet outside of the US. Even Angela Merkel, the German chancellor, recently said that the UK should be given time to determine when it wants to kick off the official two year divorce process.

A second article, “EU Budget: British Breakaway to spark wider disputes on financing“, demonstrates that clear fact that the UK is a net contributor to the EU, to the tune of about £10bn (real, 2015).  As such, post execution of Brexit, the U.K. will have more money to spend on its own priorities and the EU will need to cut back spending unless it seeks to fill the gap made by the UK’s leaving by increased contributions from its remaining members.

The final FT article I spied calls out an unintended consequence of Brexit that may have long term impacts on global security and power. And this is not from the point of view of an aged and retired empire but from the point of view of tipping points. The article is called, “Tokyo fears Brussels Will Lift China Arms Ban after Brexit.”  This is a most interesting twist on Brexit not discussed in the press.

Britain is today a sizable advanced economy, globally connected financially (legacy, thanks to the pound being a past reserve currency), economically (due to being heavily reliant on trade), and politically (due in part to the export and use of the English language, common and business law and democratic practices). However some of the trappings of its empire led to some unique positions around the world. In 1920 Britain was allied with Japan, with stronger naval ties than with the US. This was partly as a defense mechanism from the UK perspective; post WWI the UK had lost its financial ability to project itself globally and was increasingly reliant on the benefit of others (e.g. US) and less so on its own asses. This was also partly a reflection of Japanese goals; it was seeking to emulate the success of the British Empire, founded on naval power, and was keen to learn from its erstwhile far-away neighbor the art of modern empire building. The alliance gave Japan credibility politically and militarily. The Washington Naval treaty of 1921 put paid to this alliance as the US forced Britain to relinquish the Anglo-Sino alliance in order to buy the support for the curtailment of expensive navel construction, at a time when no nation could really afford anyway.

But as it stands today the UK plays a key spoiling role in global politics, with a heavily nuanced and balanced position. The FT article highlights how Japan fears that with the British gone from EU diplomatic and political debate, the moderating position the UK too will fall away and views less acceptable to Japan, such as the EU selling arms to China, might now be in the ascendancy. This is a most interesting side-show that may have longer term security repercussions. Britain’s ties with China are improving, and its relations with Japan are long and very positive. Britain is again in a unique position.

If you wanted to read more about the UK-Japan connection, read Leo Lewis’s Short View for July 5. In his column he explains how the Nikkie 225 average is being hit for six by Brexit, perhaps more so than any other stock market index. He explores the relationship Japan has with the U.K. and why that leads the Japanese market to its painful conclusions.

But the reality is that no one knows what’s going to happen. Hence confidence and talking the economy up is critical right now. Astute confidence will help drive the pound up and hence reduce the losses experienced with the ‘leave’ vote.  As I said before, with Brexit re are no real winners.  But the UK has a great opportunity here…

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