Britain’s businesses need answers, and they need them fast, World First’s Jeremy Cook warns in his latest round-up of the month’s foreign exchange news.
As we approach August all eyes are on the Bank of England governor, Mark Carney, who will give his quarterly update on the state of the economy on the 4th. What he says and does, will give us the clearest insight yet on the effect the Brexit vote is having on the economy.
We know already that confidence, investment and jobs have been hit. But we haven’t had much structured data. Carney will have the most up-to-date research, which will enable him to tell us how big that hit is and how long it is likely to endure.
He will also give us a clearer sense of what the Bank intends to do to reduce the economic damage caused by the vote. This could include: cutting interest rates to possibly 0%, an increase in quantitative easing spending by as much as £100bn or even £150bn, and further lending to businesses at very, very low rates, with loans guaranteed by the Treasury.
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The short-term economic signs we’re seeing are not good. We know from talking to our clients that the vast majority – as many as four-fifths – are trimming investment: reducing capital spending, and are worried about the jobs outlook. That’s in line with surveys of all business of all sizes nationwide.
Once Mark Carney has reported, attention will quickly shift back to the new government. Brexit is a political phenomenon with an economic side-effect, not the other way around.
Theresa May’s appointment as prime minister has steadied the political ship and calmed the markets a little. What direction she sails in and how smooth the sailing is, as she and her Brexit team cross the Channel to negotiate a settlement with EU officials, is crucial.
Brexit means Brexit, as May says. But it’s not a black and white question. There are dozens, if not hundreds of shades of grey in between. We need answers to five questions – and the sooner we get those answers, the sooner businesses can get back to planning for the future, investing, and, with luck, hiring.
Those 5 questions are:
- When will Article 50 of the EU Constitution be triggered that sets the clock ticking on Britain’s exit?
- What access will Britain have to the Single Market after Brexit?
- How will ‘passporting’ of services from Britain to the EU work?
- What kind of financial regulations will we face?
- How much free movement of people/labour will May accept in return for access to the Single Market?
Need for speed
Speed here is vital. The Brexit hit could lead us into recession in Q3 and Q4 this year. It wouldn’t, in my view, be a deep recession, as we saw in 2008. It could be -0.2% or -0.1%. However, the longer it goes on the greater the long-term damage could be, especially if companies change their investment plans and decide to invest outside of the UK in other countries in Europe.
There was a lot of anger after the vote. Many were fearful, some angry. But now they have realised that being fearful and angry isn’t going to turn their business and the economy as a whole around. They – we – have just got to get on with it. The challenge now is for politicians to take the steps that business needs to begin to plan for the future.
At a time of unprecedented economic and political turmoil at home, it’s tempting to focus on Britain and Europe. But in August the US presidential election campaign proper gets underway. There will be only three months until we know who will be the new leader of the free world.
Could Trump triumph
No-one in the investment community is forecasting a Donald Trump presidency but, let’s not forget, there were very, very few people out there forecasting Brexit at the beginning of the year. If Donald Trump assumes the presidency, it would make the fears over Brexit look like a picnic.
Fears of a trade war between the US and China will prompt unprecedented concern over growth. You will see a large sell-off in equity markets and a shift towards the haven currencies, notably the US dollar and the Japanese yen.