Treasury Innovation Forum report: the post-Brexit business world

The inaugural Treasury Innovation Forum (TIF) was held in central London on June 29. With the event taking place just six days after UK voters decided whether they wished for the country to remain a member of the European Union (EU), it was decided from the outset that the outcome of the vote would be on the TIF agenda.

An audience poll reconfirmed that both British and European financial professionals continue to be overwhelmingly in the ‘Remain’ camp by a margin of five to one. Nonetheless, the public decided otherwise on the day, with a majority 51.9% supporting ‘Brexit’.

The keynote speech at TIF, entitled ‘Brexit-What now?’ was presented by John Stepek, editor of MoneyWeek magazine. He began by reassuring his audience that Brexit was not a re-run of the 2008 global financial crisis, when many banks had basically gone bust.

Despite alarming forecasts ahead of the June 23 referendum, markets were pricing in a win for the ‘Leave’ camp until the shock killing of Labour member of parliament (MP) Jo Cox, which many believed would trigger greater support for ‘Remain’. Global markets and the pound fell sharply as it became clear that votes supported leaving the EU, but the predicted freefall did not occur and volatility had eased with days.

“If things threaten to turn pear-shaped, the Bank of England and other central banks can always turn the printing presses back on,” suggested Stepek. “Indeed it’s likely [BoE governor] Mark Carney is secretly pleased that sterling has come down.” A more likely contender for triggering a rerun of the 2008 crisis would be a ‘domino effect’ in the Eurozone if other EU members followed the UK’s lead and headed for the exit.

Pragmatism to rule

The UK’s current political vacuum, with prime minister David Cameron soon to step down and its main opposition party effectively disabled, might initially present a grim picture but Stepek was more optimistic. Contenders to replace Cameron are all “free trade-friendly”, while former London mayor Boris Johnson (who has since withdrawn his leadership bid) and justice secretary Michael Gove are rather less anti-immigration that many who voted for Brexit. “They don’t want to fundamentally change the EU, they just want less interference from Brussels,” he suggested.

It was also evident that, despite talk of companies pulling out of the UK or reducing their presence there post-Brexit, few businesses wanted to undergo the upheaval of relocating. Markus Kerber, head of Germany’s Bundesverband der Deutschen Industrie (BDI) – the equivalent of the UK Confederation of British Industry (CBI) – had said before the vote that responding to Brexit by putting up trader barriers would be “foolish”.

“There will be pressure on governments to do the sensible thing,” said Stepek. While European Commission (EC) president Jean-Claude Juncker and European Parliament (EP) president Martin Schulz seek to maintain their goal of a federal Europe “pragmatism is most likely to prevail”.

There remains the possibility that the UK could follow Denmark and Ireland, which have both restaged referendums, by re-approaching voters were the EU to produce a “fudge” that appeared to offer further concessions. More likely, forecast Stepek, is that the UK reaches “a Norway-type solution” – a deal which excludes it from further EU integration while maintaining free trade and the free movement of people. “Those that voted ‘Leave’ on the promise to restrict immigration were sold a pup,” he added.

Slower growth

A UK interest cut by the BoE this month or in August and the pound edging down further to as low as US$1.20 were among the predictions in an economic update report from Sarah Hewin, Europe chief economist for Standard Chartered Bank.

For investors, she also anticipates that post-Brexit concerns over UK assets is likely to see the yield curve steepen in the months ahead and “the love affair with gilts” to end, so refinancing is likely to become cheaper over the near term although this be not be maintained longer term.

Hewin reported that the UK property market has already seen activity slowing in the second quarter of this year, investment and hiring decisions shelved and lower merger and acquisition (M&A) activity so Q3 economic growth will, at best, be flat. The medium term outlook is for the UK’s gross domestic product (GDP) to grow by only 0.5% in 2017, rather than 1.5%. Although longer term the pace is likely to recover, recouping the lost momentum will be difficult.

Across Europe, the UK’s exit has renewed fears that other countries such as Denmark and Hungary could also hold similar referendums and also that the single European’s continued existence could be jeopardised. In Italy, where the euro-sceptic 5-Star party has already won mayoral elections in Rome and Turin, prime minister Matteo Renzi could join David Cameron in stepping down this autumn if the country’s constitutional reform referendum goes against him.

France holds its next presidential election over April and May 2017 and while National Front (FN) leader Marine Le Pen is unlikely to be the candidate who displaces current incumbent François Hollande, she is expected to make it to the second round. “This period of uncertainty is not good for business or decision makers and is added to by the uncertainty over the US election,” said Hewin, who noted that although Democrat candidate Hillary Clinton currently leads, the public discontent exposed by Brexit is shared by the US and explains continuing strong support for Republican challenger Donald Trump.

Meanwhile, having finally sanctioned a small interest rate increase at the end of 2015, the Federal Reserve will probably continue to be cautious, she suggested. There are signs that the latest US economic growth cycle is running out of steam and the most recent employment data was weaker than expected. With US inflation still subdued the Fed’s next rate move is more likely to be lower again, with a cut possibly at the end of this year.

While the Brexit impact is more muted in the major emerging markets of China and India, both have their own problems. China’s economic growth, while still strong by western standards at over 6.5%, has cooled sufficiently for the government to move in and support public investment to offset weak private investment. There is also nervousness over the steady rise in China’s leverage and debt, which could rise further to 300% of GDP over the next couple of years.

India’s current main concern is that the drive for economic reform may be flagging, following Raghuram Rajan’s decision not to seek a second term as governor of the Reserve Bank of India (RBI). Hewin said that there is disappointment that many of the changes promised by prime minister Narendra Modi’s government haven’t come through, while those introduced have so far been more at state level than government level.

Hewin’s presentation included a poll in which the audience was asked which out of four possible developments caused them greatest concern. The results were:

A weak UK economy, post-Brexit 45%
US voters electing Donald Trump as president 32%
A new crisis in Europe 13%
Economic deterioration in China 10%

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