What is of concern?...
Global market volatility, an angry EU leadership and fear of a global economic shock that could become self-fulfilling. There is a leadership void in the UK but in the next few days the lead candidates will be apparent and confidence in them will be factored into the outlook for the next 6 months.
The UK has a bad hangover from the Brexit vote but Europe is heading for the emergency room thanks to its member state’s leaders being increasingly Eurosceptic; reflecting a mood amongst the EU electorate that is decreasingly enamoured with the EU project. In short, there could be other referenda to follow. 60% of France wants out.
Brexit. The good news
The UK is still in the EU until the end of 2018 at the earliest so it’s way too early to properly assess the impact of exit. To a large extent we should ignore the markets. They behaved foolishly in the last 48 hours leading up to 10pm on the 23rd June and have not been much more rational since. Some calm is being restored and indexes are not violently off the highs and lows of the year so far. The markets may sweat but a lot of money is being made during the volatility.
The credit rating downgrade is a blip, the BoE is on standby to put out any fires, the global financial infrastructure is not about to implode, banks have liquidity and there will not be the domino effect we saw with major institutions collapsing in 2008.
For the UK the currency depreciation will help exports though probably not enough to correct the trade deficit which means that inflation will creep up. Up to 3% that would be OK.
Europe may be angry but Germany, the dominant state is more pragmatic and sympathetic than any other voice and they call the shots.
Brexit. It’s not over yet.
With the risk of a break up of the UK, well Scotland leaving at least, and the undoubted risk to inward investment over the next 2-4 years it is possible that the next PM will make a very bold move. They could either call another referendum or call an election in the autumn with the mandate being to stay in Europe. Either way the outcome would be remain.
Whether or not the UK leaves is solely in the UK’s hands. The referendum is advisory and before the UK goes into any negotiations it will understand the position of each of the other 27 member states vis-a-vis the nature of an acceptable agreement going forward. Every member state has something to gain from a good relationship with the UK. Member state self-interest will prevail, especially in the newly weakened EU. Trying to bargain with 27 in one room would be crazy – but then that has been the EU..
Jean-Claude Juncker needs to go. He is quite unsuited to this situation and is very divisive.
Brexit. What businesses and consumers should do.
Not a lot. Carry on as if nothing has changed because only certainty (which is itself somewhat illusory) has changed. From what to what? That is not clear. So invest, buy, sell, build. Get on with life.
Brexit is not certain and is a long way from over.
by Stephen Archer, business analyst and director of Spring Partnerships