Likelihood of Brexit growing, says UK ex-business secretary Cable

The possibility of British voters supporting the UK’s exit from the European Union (EU) in this summer’s referendum, which once seemed remote, has grown to as much as 40% in the assessment of Vince Cable, who served as business secretary in the UK coalition government of 2010 to 2015.

A keynote speaker at this week’s Financial Information eXchange (FIX) EMEA 2016 trading conference at Old Billingsgate in the City of London, Cable addressed the “serious warning signs in the global economy”. He said that stagnation and possible eurozone deflation, plus the “crazy world” of negative interest rates, were risks matched by the Chinese slowdown and political instability. The latter could lead to the EU undergoing a ‘Brexit’ and Donald Trump becoming US president.

Volatility on the financial markets – as seen in China since last June – and the slowdown in emerging markets (EMs) also pose serious threats to the world economy, warned Cable. He told the audience of his concerns that the “very abnormal”, “emergency” and “unorthodox” policies of low interest rates and quantitative easing (QE) adopted since the 2008 financial crash were “running out of effectiveness” while economies are slowing down simultaneously.

The big risk is that the West could be on the brink of a sustained period of low or zero growth – as has persisted for more than three decades in Japan, which has twice as much debt to gross domestic product (GDP) as the UK. “How long can that go on, and will markets continue to lend to them?” asked Cable.

“You are now seeing desperate measures in Europe too, like negative interest rates to stave off the threat of deflation, which is disastrous for economies as companies stop investing,” said Cable, who is also a former shadow chancellor, member of parliament (MP) and chief economist at Shell Oil. “I’m not predicting doom, but we do need to identify the risks.”

He identified the three key threats as:

• The developed world suffering slow growth and possible recession, as EMs also slow down.
• Instability in the financial system and concern about whether the new regulatory measures post-2008 crash will work. “Large areas of financial services (FS) like shadow banking are not properly regulated yet and the unorthodox credit institutions that have funded the recent Chinese building boom could transmit risk to the world economy,” said Cable. “We could have another crash, but in a new form.”
• Global trade wars, which could break out as cooperation between countries breaks down and an anti-‘politics as usual’ mood asserts itself. “Trump has already said he wants to tear up the North American Free Trade Agreement (NAFTA) and other trade agreements,” said Cable, who pointed to the stasis at the World Trade Organisation (WTO) and problems at the UN, NATO and so on as further concerns.

The threat of Brexit

Turning to the likelihood of a ‘Brexit’ following the June 23 referendum, Cable said that before last May’s election he originally gauged it as only 5% when asked by UK-based Japanese car manufacturers to assess the scenario, but has now reassessed it as nearer 40%.

“Nissan in Sunderland, UK, for instance, is doing well because they’ve assumed they can access the EU single market and rely on common EU standards,” said Cable.

Will that still be the case in the event of Brexit and how long would it take to renegotiate British access and tariffs, if any, in the wake of a UK withdrawal? Cable did not provide any answers, but again posited these issues as risks that treasurers, business people and traders should consider.

“If you put all these elements together – unstable economies, financial and political systems – then you have got risk,” concluded Cable, who stressed that he is essentially “an optimist” who was merely pleading for “rationality” in how to approach these threats.

One short-term bright spot was India, which Cable said had the potential to take over from China as the engine of world growth – “although they do have infrastructure problems,” he added, tempering his optimism.

Fellow ‘BRICs’ Brazil and Russia, as well as former EM growth countries such as Nigeria, face serious problems though. Cable warned that western companies with bond holdings there could suffer. “We know some will go bad,” he said.

A risky outlook all round then: one reflected in the Chinese stock market’s wild fluctuations and in recent financial market, foreign exchange (FX) and political volatility around the world.

Further coverage of FIX EMEA 2016 here.

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