When Britain voted to leave the European Union on June 23 we were told that it would be a disaster. That was by the Remain camp. It was also the view of the UK’s central bank governor, Canadian Mark Carney.
Financial markets responded by dragging sterling down against the US dollar by 15% on June 24 when the result was known and for more than a week afterwards.
Someone who was at a private dinner on July 2, eight days after the “Brexit” decision said that guest Carney remarked that “Brexit will never happen”. I tweeted it at the time and it raised quite a few clicks.
In a way, Carney may be right. And certainly Remainer Prime Minister Theresa May is in no hurry to trigger Article 50 which would commence up to two years of negotiations before leaving the EU outright.
Apart from a looming legal challenge by the Remain camp to force the UK Government to give a decision to Brexit to Parliament – more than two thirds of MPs backed Remain – it seems unlikely that MPs nor May would now wish to stand in the way of a democratic decision to leave the EU.
But what is not in question is that the premier has a duty to protect the national interest. As such, she must weigh up when it would be wise to begin talks of Britain’s exit from the EU.
Rumour is that she won’t trigger Article 50 until early 2017. But there is no guarantee she will move even that soon.
While sterling is weak a decision to quit the EU would not be in the national interest. It isn’t about the ethos to leave. It is about the timing.
Therefore it is a perfectly reasonable position to take to wait until sterling regains at least some composure of strength. You don’t want to be negotiating terms for trade when the currency is artificially weakened by speculators in the markets.
Similarly, you don’t want to wait for the UK currency to appreciate too much as that would make our exports, upon which we rely heavily for our income, uncompetitive. We don’t want a situation as happened with the Gold Standard in 1918 when Britain insisted on a 1914 rate of exchange and basically priced British goods out of Europe, leading to mass unemployment in the 1920s – even before the Great Depression of 1930 blew in from Wall Street.
We should not be hurried into making a decision, just because the French or others demand it. As I have said before, a rash decision which is bad for Britain will ultimately be bad for Europe too.
And the old chestnut that if we prevaricate it will lead to other European nations to table referenda to quit the EU is simply untenable. Right now, even ardent exit nations like Slovakia are holding back. Why? Because they need proof that leaving the EU will work. Britain is the laboratory furry animal.
Britain Still Doing Well
The two months since the referendum result were always going to be tricky with financial markets playing judge and jury on what they don’t know. Uncertainty is the only certainty and traders trade on volatility and take risks with portfolios. Nothing has changed.
But while the currency has had a poor time – accentuated by a UK rate cut on August 4 to 0.25% – other assets have done rather well.
Equities. London’s blue-chip FTSE100 index fared well in the aftermath of the Brexit vote because most of its constituents are companies with diversified income streams. A weakening currency means that when their overseas operations report results to the Group finances the weak pound means that on translation the host company will see a boost to its revenues and finances.
So even for household corporates who encouraged Britain to vote to Remain in the EU they will win from the current downside for sterling. On Friday the FTSE100 ended at 6,858 – more than 500 points higher than where it ended on June 23 when the referendum polling was still ongoing.
But if that is a feat, it was far more predictable than what would happen to the FTSE250 index of mid-cap firms. These are the next biggest firms in the UK and many of them are, to coin the phrase, UK-centric. That is, they are more likely to be reliant on sales domestically and less likely to own overseas operations.
As you might imagine, they would benefit from a weaker pound because of any exports they can muster. But as they don’t have the benefit of overseas ops they benefit less from a weakening pound.
Apart from the increased risk of foreign takeover – in which case their shares will anyway rise – they might be regarded as victims of Brexit.
But while the FTSE 250 fell for weeks after the Brexit vote, from July 20 – a month on – the index began to advance. On Friday the index closed at 17,874 – more than 500 points higher than the 17,333 level it closed on June 23.
Although UK software company ARM Holdings fell to Japan’s Softbank in July and there will be other examples of “losing” control rather than taking back control in the months ahead, there will been some pluses from Brexit once the period of uncertainty ends.
The EU’s planned financial surcharge is something our banks won’t have to pay regulators in Europe. For another, our budget contributions might be reduced – all depends on what kind of agreement will be reached with the EU.
Are We There Yet?
Some of those talking down Britain made it sound as though Article 50 was triggered, the talks were ongoing and Britain was heading into the abyss.
Well, so far the only real negative sign has been the jobless figures. Yes, they looked good last week. Eleven-year low unemployment sounds very compelling. But the number of vacancies is also falling – suggesting that future jobs data may not be at all good.
Also, the closely watched Purchasing Managers Index showed the biggest decline in activity since 2009 after the leave vote.
As things stand, we are members of the EU for at least 30 more months. Some speculate that Premier May might even delay the start of talks beyond 2017. It is only unaccountable people like German Chancellor Angela Merkel who insisted that the British vote was irrevocable and exit must follow. No one is going to rush us to quit. And a lot can happen by then.
Until then, we are still benefiting from whatever the EU has to offer, which at present is not much.
A recession which was predicted by the Bank of England before the poll, has been whittled down to a close shave with recession – thanks to this month’s decision to cut rates. So a kind of self-indulgent pat on the back.
But in any case, recession needs at least two successive quarters of negative growth to constitute a downturn.
Carney has already slashed 2016 GDP forecast to 0.8% from 2.3% this month, so that probably paints the worse-case scenario. It is still growth and something parts of the Eurozone are not even expected to see in 2016.
Ratings agency Moody’s has also said it thinks Britain will avoid recession.
Last week, analysts and commentators climbed over each other to discuss retail sales, jobs and inflation numbers but the truth is their commentary means very little at this stage. A worthy opportunity for some self-promotion, at best.
Less pleasing, the public sector budget surplus was smaller than normal in July, at £1bn rather than an expected £1.6bn.
Moreover, consumer price inflation rose after the EU vote to the highest rate since November 2014. Imports will cost more while sterling stagnates.
But shoppers flashed the cash in droves it seems in July, with retail sales smashing expectations as consumers enjoyed warm weather.
Things are also looking up with other trading clubs – you thought the EU was the only club in town?
Norway, a vehement opponent initially of the UK joining the four-nation-strong European Free Trade Association (EFTA), seems to have changed its tune considerably.
Prime Minister Erna Solberg now says Britain joining with its population of 65mln would radically alter and enlarge the group which enjoys access to the lucrative European single market.
If anything, it is breath-taking that even a staunch nationalist like Solberg had ever harboured resentment about Britain joining EFTA.
Since its inception in the 1950s – before the Treaty of Rome even convened – Britain was a founding presence within EFTA and only left in 1972 when it was about to embark on membership of the EEC – the precursor name of the EU.
Norway has also been one of Britain’s closest allies in Europe since the UK helped liberate the nation from Nazi Germany. Each Christmas Norway sends a huge Christmas tree and each year Britain faithfully decorates London’s Trafalgar Square with it.
So Britain does have friends in Europe and it is reassuring to see Norway taking a fresh approach that is conducive to the future development of Britain’s relations with mainland Europe.