At 6am on 24th June 2016 it was confirmed that the UK had voted to leave the European Union. Now please note we will not be leaving immediately and the UK is still a member of the EU (and will still remain so for several years). But the vote has already triggered an extraordinary chain of events.
The Prime Minister has announced his resignation and a Conservative MP who voted to leave said we "must remember that nothing will change".
Having listened intently and read many pieces of content, most of the experts I trust believe that that everything will change and in ways which we cannot predict. Lets be clear - we cannot know what we cannot know.
A leading economist and keynote speaker for Vistage - Roger Martin-Fagg wrote in a recent article;
"The economy is always characterised by positive feedback. This means a small change in one part of the system is magnified by the systemic response".
As this blog is being written , global stock markets are decling , sterling has fallen to $1.36 (It had tumbled to lows not seen since 1985) and the UKs AAA rating has also been downgraded. Now these are knee jerk reactions but they are also destabilising. To counter this we have received positive feedback with yesterdays statements from Cameron and Osborne alongside the Bank of England making soothing noises and stating they will supply short run liquidity to prevent the wholesale market from seizing up if needs be.
We are now seeing boardrooms round the world trying to evaluate both the risks and the opportunities. It is therefore highly likely that everything will change because it has already started.
Here is some interesting background details and statistics provided by Roger Martin-Faggs document (we are accountants after all!!) as to what has caused the current challenges the world faces;
- Since the early 80s, skilled and semi-skilled workers in the USA, the EU and the UK have experienced falling incomes. The share of national added value going to capital has increased (this means shareholders). This significant increase in inequality is now being reflected at the ballot box. The voters think it is caused by the political class, and in the UK by immigrants from the EU. This is incorrect. It is actually China.
- From 1980, 1.2bn new workers joined the global economy and this depressed real wage growth. At the same time shareholders approved reward schemes for senior managers based on earnings per share growth which prompted outsourcing, labour saving technologies, and team number reductions.
- Taken in combination the result has been a major increase in income inequality in the West and the voters have now reacted to it. This is why we have Trump, Brexit, the rise of the extreme right in the EU and significant mistrust of institutions.
- The entry of China into the global system has driven the West to move further up the added value chain which has increased the demand for highly skilled employees, and reduced the demand for the unskilled.
It is the opinion of many experts that these key areas are now driving the attitude of the electorate who tend to sum it up in simple terms: blame it on immigrants, the ruling elite and the unelected bureaucrats in Brussels who are depressing wages.
According to Roger;
"Brexit does not change this at all. It is not the solution. The solution is a significant increase in the education and training of those who have suffered falling real wages."
What does the outlook look like?
History tells us that the perceived value of property is a significant driver of consumer confidence and the mortgage rate is closely aligned to the yield on Government bonds. furthermore, the yield depends on expected movements in the exchange rate, the Government’s budget position, political risk and expected inflation.
As we have now lost our AAA rating, the yield on bonds could rise, but a weaker sterling could offset this. However, if a further weakening is expected, then overseas purchasers will wait and the Government will have to raise the interest rate or cut the price in order to obtain finance. Either way the cost of financing our £1.56 trillion national debt will rise. It costs 43Bn a year at present.
Over the next three years it has been forecasted that;
- interest rates could be higher than expected
- House prices could stagnate or fall
- Inflation will be higher than expected (real incomes would therefore fall)
- Consumer spending could drop from 4% year on year to 1-2%.
- Real growth could fall from 2.5% per annum to under 1%.
- Unemployment could begin to rise in a year
- Net migration could drop to around 140,000.
- Government income falls below plan and either borrowing goes up (currently £68Bn a year) or the rate of growth Government spending has to fall.
What we also know is that there will be a new PM in the autumn. They will write the letter to leave the EU or conceivably he or she might wait to see the results of elections in Germany, France, Czech Republic, and Hungary.
For the time being existing trading agreements will remain in place which will give the UK time to build a team of negotiators (it will cost a fortune as we will likely have to poach them from Brussels!) Roger states;
"The EU is one of the least protectionist regions and that is where we should place all our efforts. However, a free trade deal will require free movement of people."
Nobody has made any numerical forecasts because it is too early to have a view however many can be confident that we should expect much lower growth than forecast at the beginning of the year. We are unlikely to have a clear view until we know who our leader is.
From a regional perspective, we know that Sunderland were overwhelmingly in favour of leaving. Nissan employs 9000 people and what will happen to the £100m investment proposed for the Nuke car? Nissan will face a 10% tariff on sales to the EU once we leave so the government better have a plan in place to protect one of our main employers. Furthermore, we wait to see the short term impact Brexit could have on the state aid coming into the region to support many of our growing businesses.
In Rogers article in is final paragraph he states;
"I suspect there are many who voted leave, with no expectation that it would actually happen, they just wanted to give the toffs a bloody nose. Regrettably it will be the working poor who will get the bloody nose over the next few years."
So we are where we are and the time now isn't to bury heads in the sand. The 2009 Recession taught us that the most successful businesses have a plan in place to mitigate the risks and capitalise on any opportunities that will arise over the coming months and years.
Keep an open mind but make sure you understand how this significant event could impact your team, your customers, your suppliers and your personal circumstances.
If you want to chat more or share any thoughts with us please contact us here