Bill Jamieson
● Luck – or the lack of it – may prove the decider as we head towards the looming deadline
On Johnson rolling the dice in Brexit snakes and ladders
Barely two weeks into his premiership and Boris Johnson has thrown the dice on a treacherous board of snakes and ladders now confronting his government.
Hissing snakes, certainly, and ladders, too – with vital rungs missing. Does anyone in the new Brexit Cabinet really know how to persuade the European Commission to re-open negotiations on the Withdrawal Deal? Or the steps that will steer us away from a disorderly Brexit on 31 October?
There certainly seem to be more venomous snakes here than optimistic ladders. And as a measure of how confident people feel about a successful outcome, the pound is an instant fear gauge: it has continued to fall on currency markets, hitting a fresh twoyear low of $1.2120 against the dollar on yesterday – how distant seems the pre-june 2016 EU referendum level when it was trading at around $1.50. Sterling has also weakened against the euro, falling to €1.0881 at one point.
With just three months to go before the deadline, it doesn’t look good on the Brexit board. But while the snakes outnumber the ladders, there are still grounds for hope that “disastrous” or “catastrophic” no-deal consequences can be mitigated.
But first, the snakes – and they seem to lurk on almost every square: the most striking of these is a further run on sterling – and indeed, other UK financial assets. Laura Lambie, Edinburgh-based senior investment director for Investec Wealth & Investment, warned this week that the pound could fall further if the UK crashed out of the EU without a deal.
“I do think that investors are looking at a no-deal as a risk, not a certainty. That does mean that if we do come out of the EU without a deal, then sterling has further to fall.” Other analysts warn that the pound could drop as low as $1.18 against the dollar.
And the further it falls, the greater the risk of a spike in inflation, forcing up raw material costs for business, squeezing household budgets and forcing the Bank of England to raise interest rates.
As it is, the lacklustre UK economy is hardly in a fit state to deal with an inflation upsurge. It has suffered a serious slowdown since the first quarter and economists at the EY Item Club warn that Gross Domestic Product “could very well contract slightly in the second quarter”. The latest Scottish Chambers of Commerce (SCC) Quarterly Economic Indicator survey highlighted cost pressures with the majority of sectors citing pressures from raw material prices and from overheads related to Brexit preparations. Almost two thirds of manufacturing firms and more than half of construction firms listed rising raw material prices as their top cost pressure.
A lacklustre July Confederation of British Industry (CBI) distributive sales survey points to consumers being cautious in their spending at the start of the third quarter. And a dire July CBI industrial trends survey points to the manufacturing sector starting the third quarter on the back foot after suffering a torrid second quarter. The CBI’S orders balance plunged to minus 34 in July as both domestic demand and foreign orders weakened.
The survey showed weakened manufacturers’ confidence and reduced investment intentions – particularly worrying for UK productivity prospects which are already a cause for concern. Prolonged Brexit uncertainty is extending caution over investment and purchasing capital goods, while farmers are increasingly apprehensive over prospects for beef and lamb.
“The prolonged jobs miracle that has seen numbers in work rise may finally be succumbing to Brexit apprehension”
Meanwhile, the prolonged jobs miracle that has seen numbers in work rise with barely a break since the economy emerged from the financial crisis may finally be succumbing to Brexit apprehension.
The UK employment rate slipped from a record high in July as only 28,000 jobs were created, marking a sharp slowdown on the bumper gains enjoyed at the start of 2019.
Much has been made in the opening weeks of the Johnson premiership of impressive-sounding public spending boosts. But how far can the new Cabinet go before resorting to ever higher borrowing? Latest public finance figures showed year-on-year deterioration through the first three months of the fiscal
“Scotland continues to be the most attractive location for international investment in financial services outside London”
year. Public Sector Net Borrowing spiked to £7.2 billion in June from £3.3bn a year earlier – the largest June shortfall since 2015.
Set against so many snakes, what of the ladders? The weaker pound may also be fairly counted as a ladder, given the effect this will have in lowering the cost of UK goods in export markets. This key competitive boost is already evident, with figures for the UK trade in services showing the value of exports here rose 5.8 per cent to £68.7bn compared with the first quarter of last year.
The weaker pound also works to boost the value of overseas earnings by UK companies. This has been a key factor behind the recent surge on the stock market. Far from a fear-driven collapse in share prices, the FTSE 100 index has climbed 14 per cent since the start of the year and is up almost 35 per cent on its pre-2016 referendum vote low.
Pay packets have been rising at their fastest pace in 11 years, with wage growth jumping to 3.6 per cent in the three months to May, as the lowest unemployment in 44 years forces employers to compete for workers. Public sector pay growth of 3.4 per cent is its highest since 2010, with extra funds going into the NHS.
Much has been made of Scotland’s particular vulnerability to Brexit. But this would be hard to tell from latest foreign direct investment (FDI) figures. Scotland continues to be the most attractive location for international investment in financial services outside London. According to the latest EY UK Attractiveness Report, the number of FDI projects in the financial services sector remained at the same level as the previous year, with six out of the seven investments being brand new projects. Our leading FDI sectors are digital and business services. Said an EY spokesman, “These figures are positive news for Scotland considering the backdrop of uncertainty felt across the UK, and show companies continue to have confidence in Scotland’s offering.”
Meanwhile, there is little sign that Brexit anxiety has dented the housing market. The Bank of England reports mortgage approvals for house purchases at a five-month high of 66,440 in June. Improved consumer purchasing power and robust employment growth have helped here.
And finally, there is a postbrexit budget where new Chancellor Sajid Javid has talked of creating a £100bn national infrastructure fund and investing heavily in housebuilding. He has also spoken of preparing an “emergency Budget” including tax cuts to help cushion a no-deal Brexit.
Fellow Cabinet minister, Home Secretary Priti Patel is a vocal supporter of probusiness growth policies. In a paper published by the Centre for Policy Studies in July she called, inter alia, for regional market support through free ports and special enterprise zones, housing supply reform to boost available land, investment in smaller, higher return infrastructure programmes across the regions, raising the threshold for employee national insurance to £12,500, and cuts to business rates and corporation tax changes to encourage investments, most of all allowing companies to write off investment costs in full.
Stormy it is set to be as we approach Hallowe’en – and a possible general election could totally overturn the board. Not for the first time, luck – or the lack of it – may prove the decider.