May’s deal won’t help a strug­gling ster­ling

The Sunday Telegraph - Money & Business - - Business - LIAM HAL­LI­GAN Fol­low Liam on Twit­ter @liamhal­li­gan

Fig­ures re­leased just be­fore Christ­mas show the UK’S cur­rent ac­count deficit widened to £26.5bn be­tween July and Septem­ber 2018. This short­fall of goods and ser­vices ex­ports over im­ports amounted to 4.9pc of GDP, big­ger than the pre­vi­ous quar­ter, but an im­prove­ment on the UK’S net trade po­si­tion im­me­di­ately af­ter the June 2016 Brexit ref­er­en­dum.

Part of this lat­est cur­rent ac­count de­te­ri­o­ra­tion re­flects higher prof­its at for­eign-owned Bri­tish-based firms, some of which then flow over­seas. While this scores neg­a­tively in the trade fig­ures, it is still pos­i­tive news.

Also, Bri­tain’s bud­get deficit nar­rowed to £7.2bn in Novem­ber, the low­est monthly short­fall of gov­ern­ment rev­enue over re­ceipts since Novem­ber 2004. So far dur­ing this fis­cal year, the deficit is 30pc down on the same pe­riod in 2017, a marked im­prove­ment.

Or­di­nar­ily, these kind of con­sid­er­a­tions – trade flows and sov­er­eign bor­row­ing needs – help de­ter­mine the ups of ster­ling. Since Bri­tain trig­gered Ar­ti­cle 50 in March 2017, though, and par­tic­u­larly over re­cent months, the pound has been driven largely by Brexit. The UK cur­rency seems im­mune from eco­nomic data, swing­ing in­stead on any po­lit­i­cal news, ru­mour or in­nu­endo re­lat­ing to Bri­tain’s EU de­par­ture in 11 weeks’ time.

The pre­vail­ing wis­dom is that ster­ling could rise sig­nif­i­cantly dur­ing 2019, as and when Brexit uncer­tainty is dis­pelled. In trade-weighted terms, the pound does in­deed look 15-20pc un­der­val­ued.

Ster­ling hit lows of $1.25 last month, as Theresa May post­poned the “mean­ing­ful vote” on her With­drawal Agree­ment and Par­lia­ment went into melt­down. Yet the long-term fun­da­men­tals sug­gest the UK cur­rency should be stronger, against both the dol­lar and euro.

The pound will stay shack­led to Brexit-re­lated pol­i­tics at the very least un­til the end of March – when we’ll leave the EU ei­ther un­der Theresa May’s deal, an im­proved deal fol­low­ing EU con­ces­sions or “no deal”. That’s un­less Ar­ti­cle 50 is ex­tended – in which case, all bets are off.

The now openly anti-brexit fac­tion across Bri­tain’s po­lit­i­cal class – “I re­spect the ref­er­en­dum re­sult, but …” was al­ways disin­gen­u­ous non­sense – could force the Gov­ern­ment to stage a sec­ond ref­er­en­dum. That would take time – mean­ing, again, Ar­ti­cle 50 will need ex­tend­ing, some­thing Brus­sels will no doubt mirac­u­lously en­gi­neer if it in­creases the chance of the UK (and our mas­sive an­nual con­tri­bu­tions) re­main­ing in the EU.

Al­ter­na­tively, of course, May’s ram­shackle ad­min­is­tra­tion could fall, lead­ing to a gen­eral elec­tion – and fur­ther months of chaos. It could well be a long time, then, be­fore Brexit uncer­tainty dis­si­pates and eco­nomic fun­da­men­tals re­turns as the main driver of our na­tional cur­rency. Un­til then, ster­ling pre­dic­tions are largely po­lit­i­cal guess­work.

The dol­lar last week ral­lied from three-month lows, af­ter Jerome Pow­ell, the Fed­eral Re­serve chair­man, said the US cen­tral bank will im­ple­ment more “quan­ti­ta­tive tight­en­ing”, fur­ther shrink­ing its bal­ance sheet af­ter years of emer­gency ex­pan­sion fol­low­ing the global fi­nan­cial cri­sis.

What sent stocks on Wall Street soar­ing was Pow­ell’s as­sur­ance he’ll show “pa­tience” when adding to the nine rate rises since late-2015, four since he took over from Janet Yellen last Fe­bru­ary. US rate rises, then, could now be on hold, with the Fed hold­ing fire as and when fi­nan­cial mar­kets wob­ble. That’s why they could weaken through­out 2019.

Sim­i­larly, the euro may de­pre­ci­ate over the com­ing year. Ster­ling is trad­ing close to €1.11, com­pared to around €1.26 dur­ing the months be­fore

the 2016 ref­er­en­dum. That’s his­tor­i­cally low, de­spite UK rates since ris­ing twice, and lately grow­ing faster than the eu­ro­zone. Ger­man in­dus­try is in re­ces­sion, the Ital­ian econ­omy is shrink­ing and French growth has stalled. Yet these fac­tors are barely re­flected in the cur­rent euro-ster­ling val­u­a­tion, given the mar­ket’s fix­a­tion on ve­nal West­min­ster pol­i­tics and Brexit-re­lated doom-mon­ger­ing.

As and when the Brexit air clears, then, the pound should rise against the cur­ren­cies of its two main trad­ing part­ners – both the US and the eu­ro­zone. That would re­duce price pres­sures, via cheaper im­ports, eas­ing the cost-of-liv­ing for mil­lions of house­holds. But, again, that’s un­likely to hap­pen soon.

Ster­ling rose last week, af­ter the Gov­ern­ment failed to block two highly con­tro­ver­sial amend­ments de­signed to frus­trate leav­ing with “no deal”, trad­ing with the EU un­der World Trade Or­gan­i­sa­tion rules in­stead. There is a wide­spread view, re­lent­lessly pro­moted by the Trea­sury and broad­cast­ers, that mov­ing to WTO rules will max­imise uncer­tainty, re­sult­ing in eco­nomic melt­down.

That is com­pletely wrong. Those watch­ing closely will know that, one by one, the “no-deal” scare sto­ries – drug short­ages, mas­sive de­lays at Calais, planes won’t fly – are be­ing trumped by re­al­ity. As gov­ern­ments across the EU move to pre­vent a mu­tu­ally de­struc­tive out­come, in­terim “no-deal” plans are fall­ing into place.

Given where we now are, “no deal” in fact pro­vides the max­i­mum pos­si­ble cer­tainty. Mov­ing to WTO rules is as un­am­bigu­ous as this bun­gled Brexit can now be. In my view, once it’s clear WTO rules are fine, and there’s no melt­down, leav­ing on these terms would then un­lock con­sid­er­able in­vest­ment, be­fore the UK signs a sin­gle new in­ter­na­tional trade deal.

Many cur­rency traders believe the most likely sce­nario is that May’s deal even­tu­ally gets through Par­lia­ment. Once she loses the vote sched­uled for this week heav­ily, the ar­gu­ment goes, Brus­sels will make con­ces­sions – par­tic­u­larly on the Ir­ish back­stop. Faced with the dan­ger of a Cor­byn gov­ern­ment, Tory rebels will then re­lent in suf­fi­cient num­bers for May’s deal to pass.

This could hap­pen. I don’t think it will but even if it does, it’s not as if Brexit uncer­tainty then abates. On the con­trary, the UK would then go into a pe­riod of ghastly “fu­ture ar­range­ment” ne­go­ti­a­tions, con­strained by EU dik­tat at ev­ery turn. That, I believe, would bring pro­longed and even more se­ri­ous po­lit­i­cal and mar­ket tur­moil, not least as Bri­tain would find it­self in an ar­range­ment so one-sided we could end up walk­ing away from an in­ter­na­tional treaty.

The cur­rency mar­kets are right that ster­ling is un­der­val­ued. But they’re one hun­dred per cent wrong to think May’s deal will clear the Brexit haze.

‘Given where we now are, “no deal” in fact pro­vides the max­i­mum pos­si­ble cer­tainty’


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