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Worried about Brexit? Don't be

Vivier and Co
21 March, 2018

Economists in favour of Remain largely agree that leaving the EU will deal a considerable blow to UK exports to Europe and weaken Foreign Direct Investment, which could lead to an increase in unemployment and a fall in GDP. Proponents of Remain argue that being part of the EU trade bloc has a positive effect on UK trade and, therefore, the country will be worse off when it leaves.

In contrast, experts and so called Brexiteers, including M Nicholas J Firzili, Director-General of the World Pensions Council and advisory Board Member for the World Bank Global Infrastructure Facility, think that the UK has much to gain from Brexit.

Firzili argues that once the UK is "freed from the ever-tightening grip of EU directives that are corroding English common law and burying British companies under piles of poorly planned regulations, the UK economy will be free to pursue a more dynamic growth trajectory, unleashing the full potential of British workers and entrepreneurs."

By taking back the right to set its own laws and taxes, having its own independent trade policy, controlling its borders as well as strengthening historic ties with Commonwealth nations, the UK will be in control of its own destiny for the first time in more than 40 years.

Buoyant exports

Success in trade and investment is clearly vital to secure the UK's future prosperity; and analysis conducted by The Financial Times, which ranks countries on export potential, suggests that countries like Malaysia, Bangladesh, Egypt and Pakistan are becoming increasingly important potential export partners to substitute what may be lost by the UK with the EU post Brexit.

Firzili is also strongly in favour of increased global trade and argues that "the UK will also have the opportunity to deepen its longstanding, privileged economic ties with other jurisdictions, such as Australia, Canada, India, Singapore and Hong Kong (all growing much faster than the EU average) without being hindered by Brussels or Berlin".

Undoubtedly, the UK will thrive beyond the confines of the EU single market and customs union and will have more freedom in trade talks with other significant export partners, such as China, India and the United States. The UK Department for International Trade, was set up in 2016, immediately after the EU Referendum, in order to forge such trade deals and kick-start exports to nations beyond the EU trading bloc.

Closer to home, Sally Dewar, International Head of Regulatory Affairs in London for JP Morgan, is calling for a free trade agreement that will cover financial goods and services between the UK and the EU. She said: "This would definitely be a novel, unique, new style of free trade agreement that would go beyond what's been previously negotiated in the past. But we think this is justified, given the uniqueness of the arrangement (...) We think it could cover a broad range of financial services and a broad range of clients."

The UK's future trade rules without a shadow of a doubt will depend on the type of trade agreement, if any, the UK strikes with the EU after Brexit. However, a study by Deloitte has found that a UK and EU free trade agreement is in everyone's best interests: failing to reach an agreement – and the UK falling back to trading with the EU using the World Trade Organisation (WTO) rules – would have a major impact on the economic powerhouse of the trade bloc, Germany, as its car industry, for instance, sells more cars to the UK than anywhere else. In 2016, Germany also had the largest trade deficit with the UK at £26m.

Simply put: "Everything must be done to maintain the free movement of goods and services between Britain and the other EU countries in the future," according to Matthias Wissmann, President of the German Association of the Automotive Industry.

Clearly, a no-deal Brexit scenario will weaken both the UK and the EU, therefore, making it highly unlikely that either side will allow this to happen.

Manufacturing boom lifts Brexit gloom

In January, the Office for National Statistics or ONS reported that UK manufacturing output was expanding at its fastest rate since 2008, with November marking seven consecutive months of growth. Over the past 12 months, UK exports of cars, machinery and crude oil have outpaced imports, according to the ONS, with cars, boats, airplanes and renewable energy projects all contributing to a healthy 3.9% increase in manufacturing output in the three months to November, compared with the same period in the previous year.

Lee Hopley, Chief Economist at the manufacturers' organisation EEF, said: "Manufacturers' expectations for the year ahead point to output and export growth being maintained through this year on the back of continuing support from a burgeoning global economy."

As a result of a fall in the value of Sterling following the EU Referendum, exports are now more competitive. Another contributing factor is global growth as the Chinese, European and US economies are all performing strongly together for the first time since the financial crisis of 2008.

Stock market volatility

As a result of this strong economic growth, the US Labour Department reported that 200,000 jobs were added to the US economy this month and that wages were growing at their fastest pace in eight years. These economic considerations alongside strengthening global growth and general expectations that inflation will rise and the Federal Reserve will be raising interest rates sooner rather than later paradoxically prompted a massive stock market sell-off.

Globally, there were wild swings too, with $4tn wiped off the value of equities in just one week. The Dow Jones industrial average suffered 1,000-point-plus falls for two days. The FTSE 100 fell to a nine-month low while European and Asian markets all experienced big losses as investors rushed to redistribute their assets.

The markets had risen steadily last year and, according to analysts, were due a "correction" – in other words temporary price falls interrupting an uptrend as the Dow Jones IA and the S&P 500 fell more than 10% from highs in January.

European markets have since moved higher, with the FTSE 100 up 1.3% and the Dow Jones IA adding 1.2%. Although there are fears of higher interest rates, making stock ownership less desirable, investors will be keeping an eye on US inflation figures as an important indicator of where the markets are headed.

That said; there is broad consensus among analysts that the fundamentals for the global economy remain strong and the prospects for growth are good.

On the back of that strong growth, the Bank of England (BoE) raised interest rates in November for the first time in a decade: by a quarter of a percent point to 0.5%. A further rise now seems increasingly likely this year as a strong global economy and low unemployment levels continue to offset the impact of Brexit, diluting again the dismal predictions of those in favour of Remain.

Final word

The UK economy is set to rebound this year in contrast to the doom and gloom predicted by Remainers. Influential think tank the National Institute of Economic and Social Research (NIESR) said that the strength of the world economy and the fall in the value of Sterling is boosting UK exports: it is expected to increase GDP growth by almost 2% this year and next, up from previous estimates of 1.9% and 1.7% respectively.

These upgraded growth forecasts clearly reflect a more positive outlook for the UK economy and the progress made by the UK Government in moving Brexit talks on to vital trade negotiations. Multinational financial service provider, Vivier Group, which has a significant part of its portfolio invested in the UK, is extremely well positioned to take advantage of the uptick, in particular with its real estate investments, which enable it consistently to pay above average rates of interest.

About the Author

Vivier and Co

Vivier and Company Limited ('VCL') is incorporated in New Zealand under registration number: 1130618. VCL maintains an insurance policy with Standard and Poor's A+ rated insurers, providing a $10,000,000 indemnity on any one claim/loss in the aggregate. Contact: vivierco.com


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