UK Edition
It’s now over a month since the UK voted to quit the European Union. We’ve since seen considerable financial volatility and some investments put on hold. Having said that, UK shares have come roaring back amid growing signs the British economy is actually bearing up quite well.
Far from going “to hell in a hand-basket”, as so many sneering Remain campaigners insisted after our historic referendum on June 23, the UK remains commercially buoyant, with consumer spending and labour markets so far appearing to take Brexit in their stride.
I accept it’s early days. Any economic assessment, just a few weeks on, relies on preliminary survey evidence, rather than official data. Such concerns didn’t stop Project Fear doom-mongers, of course during the first few days after the vote seizing on any sign of economic weakness, any setback whatsoever in fact, and blaming it on Brexit.
For the last four weeks, our national airwaves have been filled with claims by angry Remain backers – upset they lost, but even more so at being outvoted by people they view as inferior – that Brexit will be an economic disaster. Nothing could be further from the truth. And evidence is now emerging that exposes the lurid pre-referendum warnings from the Treasury, the Bank of England and the International Monetary Fund as the irresponsible and politically motivated nonsense they always were.
While UK stocks nose-dived straight after the referendum, the FTSE-100 share index is currently 6pc higher than before we voted. The FTSE-250, comprised of smaller, more domestically focused firms, is back where it was in early June.
Yes, the pound has fallen sharply since the referendum. One reason is that the so-called “smart money” was so heavily skewed towards Remain. Prior to the vote, London-based pollsters, political commentators and City bigwigs, locked in an echo chamber of self-justification, persuaded each other Leave couldn’t possibly win. When that myth was shattered, the billions of pounds bet on the wrong side unwound violently, sending the pound tumbling.
Having since stabilised, sterling is now around 10pc lower against the dollar than a month ago. That has downsides, of course, but the competitive boost for British goods sold abroad is surely welcome – given our imbalance of imports over exports at a near-record 7pc of GDP.
Many “advanced” economies, over recent years, have engaged in quantitative easing, “printing” virtual money partly to weaken their currency. The UK’s Brexit vote has just done that at a stroke. This time last year, the IMF and others were warning that a strong pound was hampering UK recovery. Now sterling is lower, that impediment has been removed.
The Bank of England’s latest monthly survey, published last week, certainly paints a more measured picture of the UK after a Brexit vote than we heard from Threadneedle Street during the referendum campaign. Gathering information from a wide range of localities, the Bank’s “regional agents” report most businesses aren’t changing their hiring or investment plans.
“There is no clear evidence of a sharp general slowdown in activity,” the survey said.
There is “little sign of any impact on consumer spending”, the Bank survey continued, despite dire earlier warnings of a massive Brexit-imposed shock. Even John Lewis, that bellwether of the British High Street, said spending was 3.2pc higher during the second week of July than the same period last year. And while exporters said they felt a lower pound would help drive their business, the Bank’s agents reported that competition would likely prevent retailers from passing on to consumers much of the inflationary impact of higher import prices.
Unemployment fell, we learnt last week, below the symbolic 5pc-level for the first time in over a decade. During the three months to the end of May, an average of 31.7m people were in work in the UK, up 176,000 on the quarter before. While these numbers predate the Brexit referendum, there is evidence the labour market has remained buoyant since. Recruitment giant Reed reports job vacancies in the three weeks from June 23 were 8pc up on the same period last year.
Even the IMF is now changing its tune. Two years ago, the Fund said that, by attempting to balance our budget, the UK was “playing with fire”. As confidence grew, and the British economy recovered, Fund supremo Christine Lagarde was forced to acknowledge this error.
But that didn’t stop her issuing blood-curdling warnings of recession if the UK voted to leave the EU. Now, just a few weeks on, the IMF says the UK will in fact grow by 1.7pc this year and 1.3pc in 2017, second only to the US among the G7 nations – in yet another blow to this vital institution’s credibility.
I accept our Brexit vote has generated commercial concerns. But the reaction to Friday’s news that the famously volatile PMI index – a survey of business sentiment – indicated a modest contraction in July has been hysterical. Given the relentless drumbeat of media negativity in recent weeks, I’m surprised the drop wasn’t sharper.
The major danger facing the UK economy now isn’t Brexit, but a systemic meltdown on European bond markets sparked by Italy. For months, this column has warned about the danger posed by the vast swathe of non-performing loans harbored by Italian banks – amounting to over 15pc of all loans outstanding, close to a jaw-dropping 20pc of GDP.
Italy is in this mess partly due to financial mismanagement but mainly because, since adopting the single currency in 1999, the country’s GDP has barely grown. Constrained by a high-currency euro strait-jacket, Italy has stagnated, causing even responsibly extended loans to go bad.
With the cost of recapitalizing Italy’s main banks standing at around €50bn, this crisis should be manageable. Yet EU rules prevent any state bail-out prior to a “bail-in” – that is, shareholders and bondholders taking a hit before any taxpayer backing. But that would mean millions of innocent Italian households lose considerable sums – as uninsured depositors or owners of widely-held retail bank bonds.
Were that to happen, Italy’s Five Star movement, which has recently overtaken the ruling centre-Left party in opinion polls, could easily take power. Having just clinched mayoral seats in Turin and Rome, Five Star is resurgent – not least due to its pledge to hold a referendum on Italian euro membership.
Given the extent to which Italy has suffered under the single currency, and is now being pushed around by Berlin and Brussels, that’s a referendum Five Star could win.
Italy isn’t Greece. Removing the eurozone’s third-biggest economy could upend the entire “European project”. So this banking crisis could go to the wire and beyond this summer, with testy, drawn-out negotiations causing serious angst on financial markets.
That’s the backdrop against which our Brexit negotiations will begin. Compared to much of the EU, then, the UK could well appear economically stable and strong. I doubt that will prevent embittered Remainers from continuing to talk down our economy, though, maintaining their invective against Brexit, as they agitate for a second referendum.
Holding another Brexit vote, when the British people have already spoken, would be a democratic travesty. I accept, though, that while the 52pc-48pc result was decisive, it was also close. So politicians from both sides of the UK debate must negotiate what Brexit means among themselves, as we collectively negotiate with the rest of the EU.
I’m glad, then, that our new Prime Minister, having supported Remain, is now fully committed to Brexit – and has appointed a trio of powerful Leave-backing ministers to start thrashing out the details. But just as Leave needs to accept it doesn’t have carte blanche, Remain must accept it lost.
And, in the meantime, what we need above all is an end to this ceaseless attempt to talk the UK into a recession that we’re actually pretty well-placed to avoid.
Follow Liam on Twitter @liamhalligan
The Brexit vote is over and the UK is fine - let’s stop the negativity