Whether it’s Brexit or Bremain, the UK is in long-term economic decline
David Brown says it is looking likely that the UK will stay in the European Union, but the economy will not easily recover from the consequences of the extended dithering
UK investors face some tough choices ahead – either Brexit happens badly, well or not at all. While Britain slumps into deep Brexit gloom, UK equity markets are still surprisingly upbeat. Markets may be sensing Brexit is never going to happen, given the impossible odds stacking up against the UK ever striking an acceptable exit deal with Europe. If so, forget about Brexit, it is Bremain – or Britain remaining in the European Union – which investors need to fear.
Either way, the outlook is grim. With or without Brexit, Britain is still an ailing industrial nation. So any short-term relief about Bremain must be blunted by the reality that Britain is stuck in the grip of longer-term economic decline. The shock Brexit vote two years ago simply accelerated the process. The jolt to confidence has ripped a big hole in investment and spending, and started unravelling many of the lifelines propping up the economy. Britain may never fully recover.
Britain is sliding into Brexit disarray. Politicians have never seemed further from any sort of reasonable political, economic or social accord. The nation is deeply divided, with voters growing more unsettled about an increasingly uncertain future outside Europe. More worrying, there is no consensus within Britain’s mainstream political parties on how to strike a workable deal on the single market, customs union or the highly contentious border issue with Ireland.
The Conservative government could be close to imploding, while the Labour opposition is on standby for a snap election at any time. A sudden election at this juncture would be fruitless. Labour is in as much of a mess over Europe as the government. Meanwhile, UK Prime Minister Theresa May’s recent suggestion of a seven-year transition period for the British exit simply kicks the can further down the road of political procrastination.
Britain has entered a netherworld of indecision and the longer it lasts the greater the chances the default option emerges – that a rational solution is beyond the government’s grasp and staying in the EU is the only plausible alternative. It might not be what more than half the nation wanted two years ago, but the odds are that the country has already tilted back the other way. Britons have become Brexit punch-drunk and recent polls suggest most voters now favour staying in the EU.
Working out a feasible timescale for Brexit capitulation is next to impossible. There will be no sudden epiphany, just a long drawn-out realisation that going it alone won’t work. At some stage, the UK political will and appetite for Brexit will simply burn itself out, requiring another general election or a second EU referendum for the log-jam to break. Europe has its own internal frictions to cope with over Italy’s unstable new government and might even throw the UK a carrot to stay put.
If there is a breakthrough, the impact on financial markets would be cathartic. Confidence in the UK pound would see a dramatic recovery, possibly boosting the exchange rate against the US dollar back to a pre-referendum range of pound/US$1.50-1.70, compared with US$1.33 currently. International investors would flood into UK equities, pushing the FTSE-100 share index to new heights. But the rally could be fickle.
Durability is the key. There may be some short-term relief for investors, thankful for a hard Brexit being averted, but with little to celebrate longer term. Britain is already paying the price of deep-rooted Brexit uncertainty, with the economy close to stalling and just a whisker away from recession.
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In recent years, Britain has slumped from being the toast of the Group of Seven economies to bottom rung of the EU growth table. It is now experiencing the slowest growth in Europe, with gross domestic product lucky to rise by anything more than 1 per cent this year. British consumers, normally the backbone of the economy, are dispirited while UK manufacturing investment has gone into post-Brexit slumber.
The global glut of easy money is always on the lookout for good news to plunder and UK asset markets could be a short-term winner if the Brexit trade unexpectedly turns into a Bremain bonanza. Unfortunately, Britain’s longer-term scorecard looks much less promising, leaving UK financial markets a short-term, high-risk gamble.
David Brown is chief executive of New View Economics