Brexit will take years, but in the meantime, life goes on
RE EU joking?” This was one of the headlines that greeted me in the UK papers recently as countries such as Spain said they wanted to take back Gibraltar as part of the Brexit negotiations, and Brussels said the UK had £ 50 billion in EU budget payments to make before they left the EU.
Earlier this month, I travelled to London to meet some of Pie Funds’ existing investments in the UK, explore new opportunities and generally kick a few tyres. During this visit, I met many business owners over a variety of industries as well as fund managers, brokers and a couple of local economists.
The message on Brexit was not quite what I had expected, and did vary, but by in large the theme was the same, this will take years to resolve and in the meantime, life goes on.
Capital Economics, a global independent research house with more than 50 economists, told me that they expect the UK economy to grow 2.0 per cent this year and 2.3 per cent in 2018, well above the consensus forecast of 1.3 per cent.
They believe the concerns over Brexit are overdone and, like many of the businesses I met with, provided their trading partners are doing well, then so will the UK.
Admittedly, the weakness in the pound, which fell around 20 per cent in the weeks and months post- Brexit against most currencies ( and hasn’t recovered) means that inflation is set to rise above 3 per cent in 2017.
Despite inflation creeping up, it’s still modest by historical standards and Capital Economics believe that the Bank of England will “look through” this inflation spurt and interest rates will remain unchanged at 0.25 per cent. However, the stronger than expected economy may cause interest rates to rise earlier than expected. Certainly, the robustness of the UK economy is not what many predicted would occur when the Brexit voters won at the polls in June 2016.
Most, if not all of the companies I met with expressed a positive attitude to Brexit despite the fact they might not have supported it. Management teams, while not expecting any immediate change, were looking for ways to benefit from it. One financial services business, which provides mortgage and insurance advice, did suffer a slowdown in the first few months after the vote as property transactions fell, but this business used that as a time to acquire weaker competitors.
Property has since recovered as many realise the UK is not going into recession but price inflation has slowed.
However, if we remove the rosetinted glasses for a moment there are some real risks if the UK and the EU cannot reach an agreement on several points. Firstly, immigration, or free movement of labour. Currently the UK’s net migration figures are around 400,000 per annum and around 80 per cent of these are from the EU. In addition, half of all new jobs created go to immigrants.
Like many prosperous western economies, the unskilled labour force and service industry is populated by new immigrants.
Anecdotally, I can say in London that all the hotels, bars, restaurants are staffed by EU immigrants. Without this immigration, the UK would not be able to grow at the pace it has and, with an ageing population, it needs young immigrant workers. It’s likely some deal will be cut on this sticky i ssue, for example free movement of labour but no access to benefits for five years.
Secondly, some industries, such as finance may suffer. One economist I spoke to believed that as many as 15 per cent of city finance jobs could be lost to places like Dublin, as banks may be required to have a bigger European presence to transact with EU members.
Construction was another industry that could suffer if foreign buyers shunned the UK. However, all this seems unlikely.
Despite the best efforts of those in Frankfurt, London is a massive financial hub, and to shift that, if indeed that’s what the EU are intent on doing, would take half a lifetime, not two to three years.
People go to London, like they travel to New York or Singapore for financial services because it’s conveniently all in one place and English is the common language.
And to counter this the City of London has developed a large tech and fintech industry that is now one of the largest outside Silicon Valley.
Perhaps the world is growing accustomed to political change. The Arab Spring, Greece, Brexit, Trump, Le Pen to name a few, have so far failed to spark the downward spiral often feared. Sometimes views have moderated, and many have realised once they gain power that enacting radicalism i s far harder than they thought.
In a recent t wist of fate, British Prime Minister Theresa May called for a snap election for June 8, three years ahead of schedule. May believes an early election will solidify the position of her Conservative Party, which would increase her flexibility to negotiate with the EU and reduce the risk of a hard exit without any deal in place.
While a month ago I had thought Brexit was going to be a very cut- and- dried affair that would be done and dusted within two years, I’ve come away realising that it’s extremely complex and the outcome will not be known for some time.
However, barring negotiation breakdowns ( which would only defer the issue anyway), I feel that both the UK and the EU will realise there are mutually beneficial reasons to stay.
Financial markets will wax and wane between interested and uninterested and things make headlines, until something else more important takes its place.
Whatever the final outcome of Brexit is, you can expect a long and drawn out process with the UK being forced to concede on many points the Brexit group campaigned on.
Mike Taylor is an economist and CIO at Pie Funds, a New Zealand investment manager.