Don’t fear for the pound
AMONG the great scare narratives about Brexit is that the pound is exceptionally vulnerable to a destabilising run because the current account, the sum total of all our transactions with the rest of the world, is in such a sorry state. The argument runs that if Britain does vote Leave today then sterling could be down the drain.
This possibility has already sent the travelling public rushing off to their local foreign exchange counters to change their pounds into euros, dollars and other currencies.
Statistically, the current account does look to be a problem. In the final quarter of last year it hit £32.7bn, or 7pc of total output. Over the full year the red ink, or financing need, was £96.2bn or 5.8pc of output. As the Office for National Statistics ruefully observed, the fullyear figure is ‘the largest annual deficit as a percentage of GDP at current prices since annual records began in 1948’.
Analysis suggests that even though the UK tops the list of rich countries with an overseas financing need it is not all bad. The figures, dating back to 1948, are pretty worthless since they relate to a period of semi-fixed exchange rates which aimed to keep the current account neutral. That ended abruptly in 1971 when Richard Nixon ended the dollar peg with the immortal words ‘f**k the lira’ – a reference to the then-dodgy Italian currency.
It is also worth noting that the most important part of the UK’s current account, the goods and services we export and import, is largely stable at around 2pc of GDP. Moreover, a chunk of the shortfall is down to our suboptimal trade relations with europe’s muchtrumpeted market of 500million people.
Which brings us to the rest. This is largely about Britain’s net investment income. A graph provided by the ONS shows this has been falling since 2011. No one is quite sure why, but it could be something to do with the adjustments related to the financial crisis.
Several of Britain’s biggest banks, including RBS, Barclays and Lloyds, have been rapidly divesting themselves of overseas interests. Similarly, the collapse in commodity prices has made a big impact on the income flows to the natural resources companies such as BNP and Shell that dominate Britain’s FTSe 100 index. There is another way of looking at this. At the same time as our earnings on overseas investments have been declining, foreign investment in the UK – which is a minus on the national balance sheet – has been climbing. We know how that sent London property prices soaring.
hopefully some of it has gone into productive investment from pharmaceuticals to car making. That’s because the UK’s economy has been outperforming its competitors and offering better rates of return.
David Cameron has predicted an ‘investment dividend’ if we vote to Remain in the shape of pent-up foreign investment returning after a nervy start to the year. The suggestion that investment will dry up if we were to go is fallacious too. Switzerland, an ‘out’ nation, has moved to negative interest rates in an effort to stem foreign inflows. Investors will go to the strongest and safest economies and where the best returns are to be made, and in the postcrisis period that has been the UK.
The markets do face some tumultuous days ahead and the pound may fall. That may be uncomfortable for those heading for their hols but it will make UK goods and services more competitive abroad and may attract greater flows of foreign investment.
In the words of Dad’s Army: ‘Don’t Panic’.
Exchange and mart
AMONG the places in the City where the referendum outcome will be most closely watched is the London Stock exchange. Chairman Donald Brydon and chief executive Xavier Rolet have staked their reputations on doing a deal with Deutsche Boerse. Politically and financially, the takeover looks hugely problematical if Britain leaves. The Deutsche Boerse works council is kicking off along with hesse politicians and the French authorities.
A fall in the LSe share price already changed the arithmetic, with the ‘merger of equals’ pretence fading away and the LSe share of the new exchange falling to 42pc. Reuters Breaking Views estimates a 10pc fall in the pound would reduce the LSe share in the deal to just 40pc. DB would then have to think twice about shifting its hQ to the Square Mile.
If Remain wins, the deal is far from watertight. Big obstacles including the eU’s fastidious competition commissioner and prudential regulators will want their say. This is a battle that is far from won and hopefully – after the referendum is done with – a reshaped UK government will see that it is against the public interest.
Beetle juice
VOLKSWAGeN has issues closer to home to deal with than the Brexit vote. having prospered at the expense of its poorer neighbours in the Club Med, company executives at the under siege car maker are having to make huge sacrifices. Gone are the fleet of private jets used to carry senior bosses, along with the executive-only lift at headquarters.
This may hardly be a corporate governance revolution after cheating consumers about emissions. But it is an illustration of the insouciance that breeds in feather-bedded German boardrooms.