As I See It
Is the government talking us into recession?
Mark Carney is manning the barricades and George Osborne has donned his tin hat. The Brexiteers have unleashed their Uncertainty Army on the UK and the Bank of England, together with the Treasury, is ready for action.
Interest rates will be cut, quantitative easing redeployed, the banks primed to unleash more lending. Carney and Osborne have the weapons at their disposal to take on the enemy.
But is the government and its allies in danger of talking us into a phoney war? Since the decision was made to withdraw from the European Union the Remainers have warned of economic armageddon. The R word is rearing its head and there is a danger that we’re already beating the retreat instead of coming out fighting.
Recessions are often self-inflicted because we talk ourselves into them. We stop believing in growth and investment and risk and all the things that help the economy to expand.
The Brexit verdict has certainly changed the rules of engagement. In fact it has removed many of the rules altogether, creating a dangerous free-for-all which could get messy. Cross-border deals that we took for granted on everything from health and safety to mobile phone tariffs, will no longer apply. There is a vacuum. And vacuums are in danger of being filled with the wrong stuff.
But should we feel threatened by the changed landscape, or embrace and look forward to the opportunities that lie ahead?
The markets were the first to deliver their verdict. Equities crashed, then recovered, and this will be the pattern for the medium term while Rumour, Speculation and that most dreaded creature ‘Uncertainty’ lie in wait.
Sterling has fallen, but that is a double-edged sword. While it will hurt importers, particularly of components and raw materials, it will stimulate exports and should help, for instance, sales of food and drink, vehicles and in-bound tourism.
A fall in the value of the pound should also stimulate inflation – something we need. It is estimated that a 10% drop in the value of the pound generates 3.3% of food price inflation. Shoppers may not like the fact that food prices are likely to rise, along with things such as fashion items imported from Far East factories, but it will do wonders for the supermarkets and other retailers who have been battling the effects of deflation.
Car manufacturing, which has been enjoying a renaissance, could continue its winning streak, but like many industries it wants quick answers on the new tariff regime with the EU which buys half of UK-built cars. Likewise, Britain’s aerospace industry, which is export-driven, wants clarification on access to the single market. In the short term both will benefit from the lower pound.
Recent figures for the construction sector show it contracting sharply, and will not be helped by the higher cost of raw materials, many of which come from Europe and which will now be hit by the exchange rate.
It’s the property sector that seems to be mainly in the frontline of the Brexit battle. Estate agents will suffer from growing uncertainty and a rise in house prices, but the commercial property sector is expected to be hit hardest.
Trading in a number of property funds has already been suspended as nervous investors withdraw their money. Standard Life Investments, Henderson Investors and Aberdeen Property Trust, have already written down their portfolio values amid worries of a collapse in commercial property prices.
The Bank of England’s financial stability report revealed that foreign investment in commercial property has slumped by 50%, a severe blow to new developments which rely on this source of funding now that the banks no longer offer lending to the sector as they once did.
Subsidies – for renewable energy and for regeneration schemes – are likely to dry up and there is a worry that both will slip down the budget agenda of future UK governments. However, this is also a political decision. As they say, where there is a will there is a way and finding financial support for vital industries and regions depends on how the government chooses to prioritise its budget.
A common thread through all sectors is the free movement of labour. It was the factor that drove Leave to victory as the voters vented their views on immigration and the politicians’ policies on handling it.
Business is largely unequivocal on immigration, seeing it as a ‘good thing’. It is the great conundrum for the politicians: how to square the circle of a Brexit vote built on keeping immigration ‘under control’, while meeting the demands of employers who want to maintain the free flow of workers around the continent.
It is also the key to gaining access to the single market. Without accepting that condition – as non-EU nations such as Norway, Iceland and Liechtenstein have done – the door will remain shut.
Forcing it open is the biggest challenge facing the next Prime Minister, whoever he or she may be.
So, does all this make us better or worse off as a result of Brexit?
The cop-out verdict is that nobody really knows because it will take months, and more likely years for us to find out if we made the best or worst decision in Britain’s post-war relationship with the rest of Europe.
Short term, however, it is clear that there are opportunities as well as risks. If the politicians do believe in ‘accepting’ the Brexit decision, the in addition to shoring up Britain’s defences they should give the country the ammunition to build a new and bigger economy.