Britain’s mounting woes are fast becoming a worst-case scenario

Global markets need to weigh up the spectre of Britain sinking into deeper debt and a possible prolonged recession

PUBLISHED : Monday, 13 November, 2017, 10:14am
UPDATED : Monday, 13 November, 2017, 10:34pm

It is no exaggeration to say the United Kingdom is living on borrowed time and heading into deep trouble as the Brexit clock counts down to Britain crashing out of the European Union in 2019. Britain and the EU seem too far apart on any mutually acceptable blueprint for leaving, raising the spectre of a highly damaging divorce. Without compromise or consensus soon, the odds are both sides will get their fingers badly burnt.

The chances of no agreement in place by the March 29, 2019 deadline means a hard Brexit withdrawal is the most probable outcome. This is causing huge ructions in British political life, with leavers and remainers at each other’s throats, bringing the risk of a UK government collapse closer by the day. If it wasn’t already bad enough for Prime Minister Theresa May’s beleaguered minority government, two cabinet reshuffles in the last fortnight underline the growing scale of the crisis.

As confusion reigns it is hard to see anyone able to make well-informed decisions about spending or investing in the UK economy. The UK stock market stopped making sense long ago thanks to the deluge of global cheap money ram-raiding its way into financial markets. At least the wobbly UK pound is showing a bit more brutal honesty, as global money traders size up Britain’s increasingly bleak economic prospects post-Brexit.

Capital flight, quickening de-industrialisation, political marginalisation and a collapse of national creditworthiness are no hallmarks of cast-iron security for any currency. In the worst-case scenario, Britain could end up barraged by a full-scale currency crisis if international confidence really starts to balk. Britain’s relegation from the first world order of major industrialised nations seems almost inevitable.

Set against this backdrop it is no surprise UK consumers, homebuyers and businesses are having problems committing to the future. Retail spending intentions are under threat, with consumers feeling the strain of record household debt exposure and growing uncertainty about what post-Brexit Britain holds. House prices, especially in the luxury end of the property market are already starting to feel the pinch. It will soon start to percolate lower down the chain.

The corporate outlook looks especially grim. Investment confidence is beginning to suffer, not least as companies feel confused about the future regulatory outlook, potential tax implications and the real risk of higher trade barriers with Europe. International banks and major financial institutions are making ready plans to jump ship and re-locate to Frankfurt, Paris, Brussels and Dublin.

The loss of Britain’s financial market flagship is bad enough for the UK economy, but the threat of a bigger exodus of Britain’s manufacturing and service companies overseas would inflict a death blow to economic well-being and prosperity. British jobs and the UK tax base would both come under serious pressure, putting living standards and the survival of the UK welfare state in doubt.

Political optimists may claim Britain after Brexit is heading for a new renaissance and a golden age of affluence based on reviving trade links with the old empire and forging new economic partnerships outside Europe. This is grasping at straws. The world has moved on and Britain needs to step up into highly competitive global markets that take no prisoners. Britain’s only comparative advantage right now is it has a seriously undervalued currency.

Global investors must consider what happens next. It is quite clear the present government’s days are numbered but could still scrape by until 2019 as the Labour opposition is probably loathed to force a snap election before then. Taking the UK out of Europe is a poisoned chalice which Labour would far rather avoid until after the axe has fallen.

The next incoming Labour government will be far from business-friendly. Under party leader Jeremy Corbyn, Labour has shifted much further left, so the political thrust will be dominated by tax and spend macroeconomic policies, mostly anathema to international investors. Threatened re-nationalisation of key British industries will add to growing market alarm.

The 1970s experience of national power cuts, industrial strife, the three-day working week and the 1976 IMF bailout were grim days for Britain, then under a progressive Labour government. It proved even tougher for beleaguered UK currency and financial markets.

Over the next few years, global markets need to weigh up the spectre of Britain sinking into deeper debt and worse economic decay. Prolonged recession is a real risk.

It is not crunch-time yet, but Britain’s day of reckoning is fast approaching.

David Brown is chief executive of New View Economics