Brexit Thoughts 1


I have been moved to write what may be the first of several hopefully occasional pieces post the Brexit debacle. The impetus was an article in the FT this morning about Mark Carney, but indignation has been bubbling under for the last week. I nearly wrote in response to my old friend and former colleague Savvas Savouri who has been publishing almost daily artidles about how this is just like 1992, and sterling's exit from ERM and the subsequent UK economic and stockmarket recovery. Savvas is the economist at Toscafund Asset Management and while I am not unaccustomed to disagreeing with the house view of that institution, I dont normally shout about it.

But this time, I wanted to canvas opinions on Carney's reaction. Funnily enough I agree with Savvas that Carney is not doing the right thing, albeit for a different reason. So a few thoughts.......

  1. this is not 1992; we are not coming from a depressed stockmarket and an economy depressed by an overvalued currency and a global economy coming out of a slowdown. This time the stockmarket is not depressed - Diageo was on a PE of 20x last time I looked, the UK economy was doing much much better than peers, and the global economy is slow and I can see only a few signs of any pickup, and more evidence of further slowdown pre-Brexit.
  2. Mark Carney is undoubtedly a well meaning man and is certainly a lot cleverer than me. I was amused to spot him on Cheapside last year fetching his own lunch from Pret a Manger (although he did have an aide with him). But if he thinks that cutting interest rates from0.5% to 0.25% or to 0% will have any positive effect, he is deluding himself. Even worse, it could have an adverse effect, as we get negative rate worries, and the banks stop lending.
  3. the reason is that the only people who will want to borrow are exporters, and not even all of them. Because the only thing that businesses are going to do is sit on their hands. Big businesses, even exporters, will not invest in the UK as they may have to relocate plants and people later. Businesses large and small will stop hiring and limit discretionary capex. This will likiely push the UK economy into a sharp slowdown.
  4. this is why FT columnist Martin Wolf is in my view wrong to advocate delay on Article 50. What we need to do is get a new leader, get on with the negotiations and invoke Article 50, adopt the Norwegian model and accept no brake on immigration.

We shall end up paying more, getting less, losing jobs to the continent and being at the mercy of our EU neighbours for a few years. The EU project is in any case likely doomed unless they accept reform before Dutch, French and German elections next year. The longer we wait, the more the risk of uncertainty and lower investment in the UK.

I shall be interested in people's comments.