Brexit: Now What?

So, now what? Britain has voted for Brexit. David Cameron has resigned as Prime Minister. Markets are experiencing high levels of volatility and the UK is now entering a period of immense political and economic uncertainty. In these precarious times, Newgate Communications latest ‘View from the Bridge’ event attempted to provide some insight into what comes next, with an expert panel of political, financial and economic commentators, including George Buckley (Chief Economist, Deutsche Bank UK), David Wighton (City Editor, Wall Street Journal Europe) and Isabel Hardman (Assistant Editor, The Spectator).

George Buckley began by telling the audience he was “very bearish” about the state of the economy and the impact on the UK when (and if) Article 50 is triggered. He said that GDP would now be revised down, with next year’s growth forecasts dropping from 2% to less than 1% (although he did stop short of predicting a recession). This would be largely as a result of investment decisions, as firms cancel or divert funds away from the UK. While the pre-referendum uncertainty delayed many investment decisions, the likely protracted length of withdrawal negotiations will put off investment plans altogether. Consumer spending would be lower, earnings will fall and unemployment could rise. Government spending, however, could rise as the new Chancellor may not be as wedded to austerity as George Osborne has been.

In terms of UK financial and monetary policy, George Buckley said that the Bank of England has a number of decisions to make in the coming months and suggested action could be taken in the autumn as economic figures worsen.  Inflation could spike as a result of the sharp fall in Sterling, yet weaknesses in the economy will encourage the Bank to lower interest rates even further and potentially restart quantitative easing to support asset prices. He noted that a further interest rate cut would cause problems for banks’ margins. Overall, it was a gloomy analysis, with little cause for optimism in the near future.

David Wighton then outlined the likely impact on the UK’s financial sector. He noted that there had been a high degree of complacency in the City ahead of the referendum with an overriding feeling that “common sense will prevail” among those in the financial services sector. Now, he noted, many of these people were shell shocked and angry with the Government for what has happened (indeed, they were angry with everyone, but themselves). There was now an expectation that there will be an extremely difficult couple of years. One of the key questions now would be over the UK’s ability to retain passporting rights, which currently allows UK-based banks to offer services more broadly in Europe. If lost, there would be significant job losses in the City.

The City of London would now be facing stiff competition from other European financial centres. Until now, international firms have found London a far more attractive location as a financial centre than other EU cities (eg Paris or Frankfurt), yet London’s position as been weakened. There is anger from overseas banks (particularly American banks) who had made considerable investment into the UK on the basis of its political and regulatory stability and now feel let down. He noted it could take years for the confidence in the UK’s stability to be restored.

David Wighton suggested that there may be some benefits of Brexit in the long term. The UK will have the ability to cut back on burdensome Brussels regulation and the London may have better access to overseas markets. Those who have supported Brexit have long maintained that the City has been strangled by EU regulations (although he noted that has been very little outlined in terms of specific regulations that would be amended or replaced). In terms of global trade deals, the processes of achieving them would take considerable time and therefore the benefits would need to be discounted. The City may become more flexible and entrepreneurial, embracing new opportunities (citing the emergence of London’s Eurodollar market in the 1960s). The prevailing view among the global financial services community, however, is that Brexit has been an act of carelessness which will cause the UK to lose a significant portion of its financial services industry, never to return.

Finally, Isabel Hardman provided a political perspective of the events and their likely consequences. She noted that this result has been David Cameron’s failure – his supposed planned legacy (economic recovery and settling of key questions over Scottish Independence and UK’s place in Europe) was now in tatters thanks to the referendum result and many commentators suggesting the Prime Minister’s had been undone by his ‘essay crisis’ approach. She said that the key root of Cameron’s failure had been his half-hearted renegotiation with EU leaders, noting he emerged from Brussels with very little he could sell to the British people – in particular, on the issue of immigration, which had long been significant concern for voters. As a result of this failure, the Government and Remain campaign had to rely heavily on ‘project fear’, focused on security and economic concerns that had very little purchase with voters.

Another key problem for the Remain campaign, she noted, was the completely lacklustre performance of the Labour leader, Jeremy Corbyn, who often looked as though he couldn’t be bothered during rallies and events. The Labour Party is currently in a deep crisis over the position of its leader, yet its problems appear to be much wider than Corbyn. Many constituents in traditional Labour seats voted for Leave in the Referendum and there is a very real risk that the Party will lose a vast chunk of support, similar to the way they lost seats in Scotland to the SNP. There is a huge disconnect between the Party and voters in its northern heartlands, as many in the political class fail to comprehend the anger and resentment behind the Leave vote. Indeed, she highlighting the awkwardness of some Labour politicians interacting with their traditional voters and compared them with “middle class passengers on a Ryan Air flight”.

As for the future, the Conservatives have confirmed that there will be a new Prime Minister by 9th September. This leadership contest would confirm a Party leader, Prime Minister and negotiator to take the UK out of EU – a job that would not be easy. The obvious candidates include Boris Johnson and Theresa May. Isabel Hardman noted that Boris was a good campaigner, but that did not necessarily make him a good Prime Minister. She also noted that there was considerable anger among MPs at the way he has used the campaign to further his career and the ease in which he seemingly changes his position. Theresa May, while notionally supporting the Remain campaign, seemed to appeal to many as the ‘serious’ candidate, given her longevity as Home Secretary. Following the election of a new leader, Isabel Hardman suggested that another general election was possible, although many Conservative MPs would be averse to the idea. She did not wish to provide any further political predictions, as there would be too many unknowns involved.

Following these analyses, there were many questions from a packed out audience. These included: What can the ‘Remainers’ learn from this result? How can politicians address the real concerns over immigration? Will UKIP be able to capitalise on this result politically? What does this mean for future investment in infrastructure? What are the likely future trading models for the UK with the EU and how will this affect the economy?

Given the location of the event (the City of London) and the make-up of the audience, it was perhaps unsurprising that there was a degree of concern and pessimism over the consequences of the referendum result, but also a recognition that the Government now has a duty to carry out the will of the British people. The challenges ahead remain are significant for UK politicians and businesses and are likely to dominate public life for years to come.

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