On Brexit Economics

Untitled1It comes to my attention that the media is reporting that the UK economy is doing well post Brexit. I’d like to address this point, because misunderstanding the economic situation tips the scales against the urgent need to block the UK’s departure from the world’s largest trading block.

Is the economy doing fine? In short, no. The Bank of England has cut rates to a new record low and resumed quantitative easing. Mark Carney has forecast at least 250k job losses.

So what’s the beef? In the media’s eyes, the economy looks far better than it is for three key reasons.

  • It is August, and this is always a funny month, with not much going on as the world is on vacation. It’s a great time for odd stories, often planted to try to manipulate the public narrative. Silly season as investors like to call it.
  • Data coming through are largely backward facing, and don’t capture the essence of real time change.
  • The economics world said that Brexit would represent an economic shock. So the media automatically pulled out its 2008 playbook. But this isn’t 2008, an acute, unexpected hit to economic confidence. It’s a known structural shift that will play out over time. It is fair to call it a shock, but this is a different category of shock. The media isn’t seeing 2008 replay, so it can argue that everything is fine.

But everything is not fine:

– Forward looking indicators like PMI data, which measure company forecasts are abysmally low.

– The pound has fallen off a cliff, leaving the UK spending over £1 bln a week more on imports as compared to last year, and probably double that since the referendum was announced.

– A weaker pound will do three things, it will push up the cost of living, squeeze incomes and reduce corporate profits. The UK had necessarily faced a sharp adjustment in its way of living after 2008, and was just starting to look stable and healthy again, now it is back down on the floor.

The UK is inextricably interconnected with the EU, everything from science to banks, to education and healthcare depends on the open flow of business between the UK and the EU.

The UK economy is 75% retail and services, how does this segment cope with the weaker pound? Exports in a low growth world simply won’t compensate, even in best case scenarios.

The UK still runs a 7% current account deficit. In the words of Mark Carney, we “depend on the kindness of foreigners” to finance our economy. Per se, this is not a bad thing, we create value internally that allows us to sustain this economic model. Or we did. The ironic thing is that the vast majority of inward funding has come from Europe. Where will it come from now?

The pound is weak, but it will likely get weaker, to make the UK cheap enough in euro terms to sustain inward investment flows. The UK economy is spluttering at best. We don’t need to wait for Brexit to see the damage it will do, but it was wrong to think that the referendum was a 2008-style event. The economy is not doing fine.