Readers may recall my post right after the EU referendum last year, when I nonchalantly labelled Brexit as a storm in a teacup. While I had previously never discounted an exit vote, I expressed confidence that Britain would weather the difficulties that were and are to come, and that we would look back in a few years and smile at the political excitement that Brexit caused between the Kingdom and the remainder of the EU.
I did however forecast volatility in the currency, which we so painfully have experienced since last June. The pound has been hit hard but is already forming a bottom against the dollar. Against the Euro it is currently testing new lows and may nudge further towards parity. This may be due less to Sterling weakness but the run-up of the Euro that I suspect to be caused by a massive short-covering wave in the wake of recent election results.
To be fair though, I think the storm-in-a-teacup analogy may have been a little too lighthearted when reflecting on the mostly diplomatic but quite hostile encounters between London and Brussels over the past year. Only now, after many months of bickering, does it seem to transpire that a clean Brexit is a possibility and can be agreed on. Still, it’s probably going to be an interesting 18 months until Britain formally leaves.
Remember the Cassandras arguing that the UK will be poised to have the short end of the stick in that process and suffer badly from eventually being outside the union. They may not make as much noise now as compared to when we came out of the referendum, but their index finger keeps on wagging. Well, as much as it will be too big an event to fit into any teacup, it looks like it will also not derail Britain’s economy and turn things upside down.
Such a scenario is nowhere near. The persistent current account deficit for example is one item the pessimists have been zooming in on. How can this admittedly sizeable deficit be maintained, if global capital shuns London and the UK as a non-EU member. To be sure, we will only know when we finally get there, but if the numbers are correct, Britain doesn’t seem to have had any problems importing capital since the Brexit vote.
Look at foreign reserves as one of the measures. Last month they hit a new record high of 161.3 billion dollars equivalent, approx. 30 billion more than at the time of the referendum. There are no outflows as predicted. Quite the contrary, Britain seems right on track and as an economy attractive enough to import sufficient capital to balance out its trade deficit.
It also appears that the weaker pound isn’t giving Mark Carney and his colleagues at the Bank of England any particular headaches. There were zero consumer price increases recorded last summer going into the vote, and we have since moved to around +2.5% managing to stabilise at this level. So the pound weakness has in fact not imported inflation that is unsustainable. On the contrary, other central bankers and politicians are probably jealous.
What’s also promising is that consumer sentiment remains surprisingly strong considering the weaker currency and potential hiccups with Brexit. July’s retail sales were softer from 2016 and in line with the other monthly readings so far this year, but they were still solidly positive. Life seems to continue on the Island, whether there will be Brexit or not…
And let’s not hastily discount one scenario that has entirely fallen between the cracks amid eurocrats’ jubilation around benign election outcomes and some up-current in sentiment on the Old Continent. Complacency always proves to be a fickle thing. Only history will tell whether the Brits may look back one day and thank god to have had the foresight of getting out on time.
P.S. As a quick heads-up for people in the region, don’t count on Hong Kong to be operational today. The city is being battered by Typhoon Hato and storm signal T8 has been issued this morning. So we will be hunkering down for most of the day.
