Post Brexit Economics: Instability, Uncertainty and Optimism

Following the surprise Leave vote, Britain’s economy was  plunged into a dizzying unknown. Such unknown and uncertainty also hit the European economy, and the global economy braced itself for a hit to growth and unemployment.

As the result was announced, financial markets illustrated the turbulence and volatility that could lie ahead for the world’s fifth biggest economy. The pound collapsed spectacularly to its lowest level against the dollar since 1985. As the UK financial leaders sought to reassure nervous markets, the pound did start slowly to bounce back, a trend which continued after the weekend.

The UK must now face up to drastic economic (and political) change, as International Monetary Fund head Christine Lagarde called upon both Britain and Europe to work together to ensure that any withdrawal will occur smoothly. Before any negotiations even begin, a financial storm has already started across global trading floors.

Although intentionally no negotiations will start immediately, allowing for a ‘breathing space’ for both economy and the political arena, the very many political uncertainties linked to any exit process are also set to impact Britain’s economy (and indeed will be felt in Europe) in the medium to long-term, according to experts.

Prior to the vote, and his resignation as Prime Minister, David Cameron had warned that it could take more than a decade to withdraw from the trading bloc, and to negotiate new international trade deals. Further to that, the World Trade Organisation has predicted and warned that British exporters risk an extra £5.6bn ($8.2bn, €7.2bn) in extra annual customs duties after leaving the bloc.

With all sides stressing it  is currently ”business as usual”, it is unlikely that these duties will be implemented any time soon. Both the British and European banking and car manufacturing sectors (noteably the car manufacturing industry in Germany) have made it clear that many jobs would have to be relocated abroad as a result of the vote. US investment banking giant JPMorgan Chase on Friday was the first to warn that it could relocate British jobs abroad in reaction to the vote. JPMorgan currently employs 16,000 people in Britain; Chairman & Chief Executive Jamie Dimon has previously said that up to 4,000 jobs could move out of Britain.

The financial sector has long seen the City of London as a “gateway” into Europe. Whilst the Out vote will not in any way diminish the status of London as a global financial hub, many thousands of banks and financial institutions could restructure their operations, and move jobs and offices to Europe, to enable them to trade within the EU. Prior to the vote, finance lobbyists TheCityUK predicted that following an EU exit, London could shed up to 100,000 financial sector jobs. According to  Scott Corfe, a Director at the Centre for Economics and Business Research, there are “a number of large companies that say they are using the UK as a gateway to Europe and a number of companies have said that they would relocate their headquarters in the event of a Brexit — moving out of London to other financial centres in Europe.”

Immigration was a key (and heated) area of debate and discussion on both sides during the campaigning. Any Brexit would also change Britain’s immigration landscape if fewer people from EU member states came  to Britain to work — this is another factor which risks impacting on future UK economic growth.

Despite the predictions, there is also a growing feeling of optimism. Efforts from the Treasury and the Bank of England have overall been successful in calming volatile markets reacting initially to the vote. Further, many financial markets have already started to see a slow return, although not to previous levels. The delay in any Brexit is also seen as helpful, as it allows for industries and individual companies to prepare for any Brexit.

Either way, whether pursuing optimism or negativity, the outlook remains very uncertain for the UK economy – and for the European economy. Additionally, the uncertainty is not limited to economics, as the political landscape is also been redrawn across the Continent in response to the vote.

Confederation of British Industry Members Favour Staying in EU

CBIThe majority of members of the Confederation of British Industry (CBI) are in favour of staying in the EU in the upcoming referendum, a survey has revealed. The group, which is the largest business lobbying organisation in the UK, has elected to remain neutral in the debate about whether to leave or remain in the EU, but did conduct a survey of its members in which roughly 80% of respondents expressed a preference for remaining part of the union.

The survey involved the questioning of 773 companies, which was carried out by polling specialists ComRes. The survey found that 80% of respondents were in favour of staying in the EU and 15% were unsure about whether they would prefer to leave or remain, leaving just 5% in favour of an exit. Bigger companies, the survey showed, were more likely to favour the UK retaining its EU membership than smaller and medium-sized companies.

CBI director-general Carolyn Fairbairn said that while the organisation would continue to take no official stance either supporting or opposing an EU exit, it would also draw up the economic case for staying in the EU. Fairbairn said that “it is not [the CBI's] place to tell people how to vote,” but also recognised that “the message from our members is resounding – most want the UK to stay in the EU because it is better for their business, jobs and prosperity.”

Fairbairn went on to say: “Walking away makes little economic sense and risks throwing away the many benefits we gain from being part of the EU.”

Even so, she said the CBI also recognises that it does have members who do wish to leave the EU, and as such the organisation “will continue to respect and reflect their views and campaign for EU reform to get a better deal for all businesses.”

The CBI survey comes soon after the head of another major British business organisation, the British Chambers of Commerce (BCC) stepped down following a row about the referendum. Like the CBI, the BCC has elected to remain neutral and not campaign for the country to either remain in the EU or leave. Despite this, former director general John Longworth spoke at the BCC conference in favour of leaving, a move which the BCC said was likely to create confusion about the organisation’s non-partisan stance.

Matthew Elliott, chief executive of Vote Leave, welcomed the CBI’s continued neutrality. He said that the CBI had “seen sense” in deciding not to campaign in the referendum. However, he was critical of the survey and its outcome, saying that the poll had been skewed towards larger businesses and that the CBI “consistently misrepresented the views of business on the issue, acting as little more than the Voice of Brussels.”

Bank of England Forcast for 2016: An Interest Rate Rise?

In response to uncertain times and events for the US economy, the United States Federal Reserve has hinted that interest rates might rise in 2016. Will Mark Carney at the Bank of England follow Federal Reserve chief Janet Yellen’s lead?

In years past, Mr Carney has hinted that 2015 and 2016 will see interest rates rise again. Now that 2016 has finally arrived, with a re-emerging UK economy, the indications are still that he will. However, that is still unknown – but likely.

Late 2015 saw the Bank of England revise their predictions for growth and inflation downwards. Their prediction was that growth would be 2.7%, not the 2.8% initially forecast. The same figures revised the estimates for growth for 2016 down to 2.5% from 2.7%. Regarding inflation, the report predicted that inflation would remain below 1% until the second half of 2016. The quarterly inflation report indicated that growth globally had weakened, with some emerging economies slowing markedly.

This has fuelled speculation of no rate rise for this year. In a vote in late 2015, a rate rise was dismissed by 8-1, with McCafferty being the lone ‘hawk’ proposing a rate rise. Still, as economic times change, a rise is still possible. Analysts predict that any such rise will be seen at the end of 2016.

Inflation in two years is expected to be above its 2% target if some market expectations are followed. Although strong, the economy did falter towards the end of 2015, and is starting 2016 amidst falling commodity prices, economic shockwaves from China, and general unease.

Further to that, the initial weeks of 2016 have seemed dire from an economic viewpoint. Not only has financial data from the end of 2015 thrown up disappointing figures and performance across the board internationally, and indeed seen in many cases less growth than expected, but oil prices remain resolutely low. That latter has had a knock on impact upon global economies, and a variety of industries. Many (such as Goldman Sachs and French energy giant Total) also predict that such low oil prices are here to stay for the forseeable future. In the UK, housing remains an uncomfortable and unresolved economic and social issue- whilst across the EU, there is uncertainty concerned a potential ‘Brexit’ with a UK referendum soon to be called.

However, it is not all economic doom and gloom. Data from 2015, and early evidence from 2016, indicates that whilst not good- the national and indeed international economy is not all that bad. Following several financial crisis in recent years, that is especially the case. Furthermore- it is only January. There have been no statements or figures released yet, nor Mr Carney’s signature forward guidance. However, the feeling at Threadneedle Street is one of cautious optimism.

Whether there is a rate rise or not, it is unlikely to be drastic. What is more likely, and certainly more drastic, are the unwelcome impacts of cheaper oil and has on the UK markets, and a resolute Chinese slowdown.

Troubles are ahead – but the prior performance of the UK economy in recent years has shown that it is not all doom and gloom, and that recovery and growth are also ahead for 2016.

UK Lags in G7 Productivity

The UK is lagging significantly behind the other nations of the G7 in terms of productivity, according to the latest analysis. 2014 saw Britain lag further behind other member nations than at any other time since 1991, and this could be putting extra pressure on members of the public and holding back the UK’s standards of living.

Newly-released data from the Office for National Statistics (ONS), UK productivity was below the average for the G7 by twenty percentage points. This places the UK’s performance a little way behind that of Canada and Italy over the course of 2014, and very markedly behind Germany, France and the UK.

“UK productivity continues to lag behind other developed economies,” said Joe Grice, chief economist for the ONS. “Since the economic downturn,” he continued, “productivity growth has slowed in most developed economies, but by more in the UK than the average.”

In July, Chancellor George Osborne announced plans to try and boost productivity. This will be done, the Chancellor said, by introducing measures designed to encourage more long-term investment activity by businesses and to boost investment in infrastructure.

The reasons for the UK’s current low productivity are many and complex, with different experts offering different opinions on what they believe to be the key factors at play. However, there are certain factors that are more widely believed to be playing a role in holding back the UK’s levels of productivity. IHS Global Insight’s chief UK economist Howard Archer believes that one major factor hampering productivity growth is the fact that much of the UK’s job creation since the financial crisis has taken place in lower-skilled and lower-paid work. These kinds of jobs make only a small contribution to productivity compared to more specialist, more skilled, and more highly-paid roles.

This is concerning news, as many experts believe that boosting productivity is one of the keys to bringing about higher standards of living for UK residents. However, not everyone is in agreement with the idea that productivity should be a major focus for the UK economy at present. James Sproule, chief economist for the Institute of Directors, said that the UK’s businesses should not be focussing too much on profuctivity but rather on what he described as “agility.”

“The economy of the future looks set to be dominated not by big companies, but by fast, agile, quick-moving and reactive ones,” said Sproule.

He elaborated: “The firms that can respond to consumer demands most effectively and bring new products and services to market will reap the rewards.”

Interest Rates Could Rise at Start of Next Year

rising-interest-ratesMark Carney, governor of the Bank of England, has indicated that a rise in interest rates could finally be on the cards after a long period of sustained near-zero rates. Carney suggested that the right time to increase rates could be “at the turn of this year.”

However, this remains far from set in stone. At present it is only a suggested possibility, and Carney warned that any planned rate rise could be altered to reflect any shocks to the economy. Any intention to raise rates will remain highly subject to alteration with regards to both the timing and the size of the increase.

Interest rates are currently at a historic low level of 0.5%, and have been there for the past several years as the UK slowly effects its recovery from the global recession. In a speech given at Lincoln Cathedral, Carney predicted that the next three years will see rates rise steadily until they reach a level of roughly half of the historic average rate. This would place interest rates at the end of this three year period around the 2% mark.

Carney said: “It would not seem unreasonable to me to expect that once normalisation begins, interest rate increases would proceed slowly and rise to a level in the medium term that is perhaps about half as high as historic averages.”

Factors such as lower oil prices are playing a role in the expectation that interest rates may finally rise in the foreseeable future. The governor was keen to stress the fact that any rate rise would only take place with careful planning and monitoring of the way it would impact on the everyday finances of UK households.

Some have been surprised by Carney’s predictions about rate rises, come hot on the heels of the news that unemployment in the UK has gone up for the first time in two years. Some experts have suggested this indicates that the bank believes falling unemployment is being hampered by a shortage of skills – a factor that could also account for rising wage inflation.

The Monetary Policy Committee (MPC), Carney said, will most likely “have to feel its way as it goes.” Outgoing member of the MPC David Miles recently said that an increase in rates was “likely to be right” in the near future. Miles has always been one of the MPC’s more cautious members when it comes to rate rises and their possible impact on the UK, so his endorsement has been taken as an indication that rates could indeed rise in the near future.

Greece Unable to Make June Debt Repayment

Greek FlagAccording to the country’s interior minister Nikos Voutsis, Greece cannot afford to make a debt repayment to the International Monetary Fund (IMF) next month. Speaking to Greek TV, Voutsis said that the €1.6bn that the country was due to repay to the IMF in June “will not be given and is not there to be given.”

The current government of Greece rose to power in an election several months ago partly on the back of promises to deal with the country’s debt situation. Renegotiating the terms attached to bailout loans was high on the agenda, and talks between Greece and the IMF, along with the European Union (EU), have been intensive over the past four months. Specifically, the three parties have been negotiating over economic reforms which are being demanded by the EU and IMF before making the final tranche available to Greece.

Greece has benefited from two bailouts provided jointly by the IMF and the EU, worth a total of €240 billion, to be paid to the country in instalments. The last payout was made in August, and the final tranche is due to provide the country with €7.2 billion which are considered highly important for the nation’s recovery plans. However, the country must first meet its June repayment deadline in order to qualify for this final payout. As the country reportedly does not have the money to make this repayment on time, it must come to an agreement with the IMF and the EU in order to avoid a default, or else risk losing access to this important final instalment of its loans. Previous attempts to negotiate have not always gone well for Greece.

The country’s finance minister, Yanis Varoufakis, maintains that the country has been working hard to keep up with its obligations under the agreement and “has made enormous strides.”

Now, he said, the international institutions to which money is owed by Greece should “do their bit” in return. “We have met them three-quarters of the way,” Varoufakis said, “they need to meet us one-quarter of the way.”

If Greece does end up defaulting on its loans, there is a danger that this may form another step towards leaving Europe’s single currency. This, Varoufakis said, “would be a disaster for everyone involved.”

It would, he continued, “be a disaster primarily for the Greek social economy, but it would also be the beginning of the end of the common currency project in Europe.” He believes that once people start to see the Eurozone as something that can be divided, “it will be only a matter of time before the whole thing begins to unravel.”

 

UK Household Debt to Hit £10,000

Money 2According to prominent accountancy firm PricewaterhouseCoopers (PwC), UK households will have an average unsecured debt level of £10,000 by the end of next year. This would be the largest consumer debt figure ever, in terms of the total cash value of debts.

The predicted £10,000 figure excludes mortgages (which are secured debt), but includes such things as student loans, borrowing from banks, and credit card spending. The forecast was made by PwC in a recently published report examining recent trends in consumer debt levels and how these might continue over the coming months and years.

According to PwC’s report, unsecure consumer borrowing increased by 9% last year, a total increase of £19.7 billion across the UK. As of 2014, PwC reported, the average household owed a little under £9,000 through unsecured credit. This somewhat contradicts the opinion of the Bank of England, which suggested in a recent report that the unsecured debt of the average UK household was closer to the £8,000 mark.

The forecast average unsecured household debt level of £10,000 would represent a record high. However the report was accompanied by a consumer survey which suggested that the majority of consumers have high levels of confidence in their ability to repay debts. This could be at least in part down to low interest rates. With interest rates maintained at rock-bottom levels for several years now, borrowing is affordable and consumers may be more willing to take on debt simply because they are more confident in their ability to repay it.

The increase in unsecured debt might therefore be partially caused by consumers’ increased confidence in their ability to repay. However,this is far from the only factor at play. According to PwC, one key driving force behind the increase is a rise in student borrowing as more people – including mature students – attend university with each new intake. Student loans accounted for 46% of the total increase.

The other main type of borrowing to rise was credit card spending, which was behind 22% of the increase in unsecured debt through 2014. Other types of borrowing, such as loans or overdrafts, made up the remaining 32%.

The confidence that consumers have in their own ability to repay these debts seems not to be entirely misplaced, as the PwC report suggested that most households have their borrowing under control. Nonetheless, the report contained a definite word of warning. There is a danger, it said, that debt sizes as a percentage of household income could exceed the peak seen just before the credit crunch hit in 2008, and as a result “consumers could begin to feel squeezed once again.”

House Price Growth Slowing but Market Still Positive

House PricesThis month has seen the slowest growth in British house prices for more than a year. British home values rose just 7.2% over the twelve months leading up to December, representing the fourth month in a row of deceleration and the lowest annual rate since November 2013.

The North of England bucked the trend, and experienced an increase in the pace of year-on-year growth. However, this was very much the exception to the rule. The other twelve regions of Britain all consistently saw growth in house prices slow.

Nonetheless, there are still a number of positive signs to be seen in the market. Earlier this month, it was pointed out that though house price growth is slowing, it still remains ahead of inflation. In fact, official figures showed that growth in house prices significantly outstripped general increases in the cost of living. This means that though the situation is not as strong as it once was, properties are still accruing appreciable equity for homeowners and investors.

Now a survey from Nationwide, has said that the future of the UK housing market looks positive in spite of the current slowdown. Though it was this survey that identified the fact that the market has now reached its lowest annual growth rate for over a year, it also said that the market is in a promising position for a recovery in 2015.

According to the survey, if the wider economy sees the type of improvement that is forecast, this will bode well for a recovery in the housing market. Furthermore, the report predicted that the loss of interest from buyers may soon reach its trough and start picking up again towards the next peak.

Furthermore, according to HIS Global Insight economist Howard Archer: “There is also the possibility that the markedly increased likelihood that the Bank of England will not lift interest rates before late 2015 will provide some limited near-term impetus to housing market activity.”

Overall, the report predicted such a recovery was likely to take place in 2015.

A number of factors are believed to be behind the decrease in the growth rate of property values, which has been happening since the middle of this year. One cause is believed to be the tightening of mortgage regulation. This required lenders to introduce tougher checks and more stringent criteria when assessing a potential borrower’s ability to repay, and this impacted on the number of new mortgages.

Hong Kong attracting Islamic Investors

The government of Hong Kong is issuing its first sharia-compliant bond designed to target Islamic investors. The highly anticipated new investment is hoped to help cement Hong Kong as a global centre for Islamic investors, and the intention is for further Islamic bonds to follow.

This bond will take the form of a Sukuk, a form of security which provides opportunities comparable to other bonds, but handled in a way that complies with sharia law. Instead of paying interest, bonds are used to enter into a purchase and lease agreement to generate returns, with a compulsory buy-back at the end of the term. As interest-based lending is prohibited under sharia law, this type of security is useful for Islamic investors as an a way to benefit from the relative stability of government bonds.

Standard Chartered and HSBC have been mandated as the lead book runners and managers of the bond, according to a recent announcement from the Hong Kong Monetary Authority, and the resulting Sukuk will use the dollar as its base currency. Other bodies will serve as joint book runners, including the Abu Dhabi National Bank and CIMB.

The debut note will be raised by Hong Kong Sukuk 2014, a body formed and fully owned by the Hong Kong government for the purpose of issuing securities for international markets which comply with Sharia law.

Hong Kong are not alone in issuing sukuks in the hope of drawing international funds from Muslim investors around the world. In June of this year, the UK became the first Western country to issue a sharia-compliant bond. This was issued shortly before Ramadan began, and quickly attracted more than £2 billion worth of orders from Islamic investors around the world. According to UK Chancellor George Osborne, issuing the bond is part of a plan to put the UK economy at the centre of global finance over the long term. A sharia-compliant bong is also expected from Luxembourg, and both Pakistan and South Africa have expressed interest in launching their own bonds for the Islamic market.

Hong Kong has similar goals to Britain in mind, and is hoping that its own Islamic bond will experience similar success. The Hong Kong Monetary Authority’s deputy chief, Peter Pang, has confirmed that the country has put a special tax framework for sukuks in place, designed to put them more on a par with conventional bonds.

Business heavyweights take on Bank of England roles

George Osborne has appointed Don Robert, Dido Harding and Dorothy Thompson to the Court of the Bank of England and thus ignored legal argument and corporate governance rows. The Chancellor has most recently taken steps to appoint three of the countries most well know bosses to act as directors to the Court.

The appointment of the three heavyweights appears very controversial due to two of them being in the middle of a corporate governance row and the third involved in a legal suit against the government. One of the men appointed, Don Robert is the current chairman of Experian who were most recently heavily criticised by the industry regulator and further involved in a row with their investors is set to start his role in August by joining the Bank’s governing body.
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The appointment is complimented with two of the City’s most respected women the first, CEO of Drax, Dorothy Thompson and the second, TalkTalk boss Dido Harding. The former who is at the moment in charge of the UK’s largest power station in April stated that her company, Drax, are too seek a legal remedy following the unexpected withdrawal of subsidies by government ministers. The subsidies drought heavily impacted the company which saw its shares drop by 13% on the market.

On the other front, Ms Harding has most recently been grilled by her own board at TalkTalk for her lucrative pay package in which investors were strongly advised by consultancy firms to vote against the “excessive” pay package.

The three bosses will be tasked with advising the Governor of the Bank, Mark Carney with all aspects of running the institution. They will be able to share their expertise on things such as setting objectives and drafting strategies in order to assure that the funds are used meaningfully and efficiently. The bosses will have no restrictions on matters relating bank business with the exception of the main function, that being the setting of the monetary policy which is to remain strictly the function of the committee.

George Osborne, the man who officially recommended the trio to the Queen for her formal appointment in a statement said “all three are highly qualified and experienced people who will strengthen and diversify the Bank’s board.” The new appointments are due to replace departing non-executives Lady Susan Rice, Sir Roger Carr and Lord Adair Turner.