‘Leave’ voters left with little to rue three months on

The cost of imports may have risen but the depreciation of sterling has given a boost to the UK economy and lower and middle income earners will benefit, writes Kyran Fitzgerald.

At the weekend, Europe’s leaders gathered together for an EU summit at Bratislava, the Slovak capital.

For the first time, at a summit of an enlarged EU, the British prime minister of the day was absent.

It is as well that Enda Kenny has apparently rediscovered his famous ‘mojo’ as these are tricky times for Irish diplomacy as the dust from the explosion triggered by the Competition Directorate General report has only begun to disperse.

In a week’s time, we’ll mark the three-month anniversary of the momentous British referendum result.

So where actually do we stand?

Some expected that the UK Government would have invoked Article 50 of the Treaty by now, but they will not have reckoned with Theresa May and her Chancellor, Philip Hammond, two pretty shrewd, cagey politicians.

May, in recent weeks, has moved to slap down David Davis, the cabinet minister officially in charge of the Brexit negotiations after he appeared to make specific commitments in the House of Commons.

It is clear that the Brexiteers in the British Government are going to be kept on a tight leash, but this in itself is no guarantee that a soft exit, involving continued UK membership of the single market, will be the ultimate outcome.

Many on the ‘Leave’ side suspect that May and her inner circle may be seeking to win a majority of the electorate around to the minimalist approach by allowing facts to establish themselves on the ground.

According to this line of thinking, the public will be brought to realise that clampdowns on immigration and trade threaten to deprive firms, and by extension the wider economy, of skills in short supply while greatly increasing the level of regulatory burdens carried by traders, boosting the cost of imported goods while hindering exporters.

The problem for the Remainers is that many of the ill effects of Brexit flow through gradually over a period of several years. At the same time, some real benefits are being felt up front.

The depreciation in sterling may have pushed up prices of imports, but it has given a real fillip to the economy.

More Britons stayed at home this summer, a trend reinforced by developments in France.

There are strong signs that the London property bubble may be bursting. While a drop in prices has not yet been captured in the data, it is taking much longer to shift properties.

Most people at this point would welcome a pricking of the bubble given the drop in affordability that has occurred.

The fall in affordability has hit middle-class families with children and low-income earners especially hard.

A popping of the bubble, assuming it is not severe enough to damage the banks, would come as a welcome tonic to many.

High asset prices can actually undermine consumer confidence once a certain stage in the cycle has been reached.

While the fall in sterling since June 23 has been sustained, the stock markets rebounded after an initial sharp decline.

In late August, it was reported that around £5bn net flowed out of UK stock market funds into the bond market.

The Governor of the Bank of England, Mark Carney, swallowed some humble pie, conceding that he may have acted too quickly to head off a perceived risk of a recession by embarking on a round of quantitative easing.

In Ireland, we are already witnessing some negative effects, with reports of hundreds of job losses in the highly price sensitive mushroom sector.

Ibec’s food & drink federation has warned that as many as 7,500 jobs could be on the line in the sector if sterling weakens further to around 90 cent against the euro.

It is worth noting that the dollar has moved strongly in the other direction, with the greenback trading at just $1.12 to the euro against $1.40 not so long ago.

The fact that Britain has avoided recession is a matter of rather greater importance than any impact of a devaluation in the pound. This is certainly the view of Alan McOuaid of Merrion Capital.

The Merrion economist believes that sterling, if anything, is likely to strengthen against the euro over the coming months and over 2017, as a series of political events unfolds, beginning with a key referendum in Italy, next month, which could result in the departure of Prime Minister, Matteo Renzi.

Across Europe, markets have remained remarkably stable. In fact, there have been far less ructions than there were in the late summer of 2015 when fears of a Chinese meltdown triggered a big sell-off that was eventually corrected.

More attention is being paid to the latest likely move on rates by the US Fed.

So far, the increased possibility of the election of Donal Trump has not triggered a reaction. Have investors been asleep at the wheel?

Oxford Economics have warned that a Trump victory followed by adherence to his promise to crack down on imports could cost the US economy four million jobs and at least $1 trillion ($1,000bn). This would indeed be ‘Brexit on stilts’.

Closer to home, the UK referendum result has triggered little in the way of soul-searching at the heart of Europe.

In last week’s State of the Union address, the Commission president Jean Claude Juncker, somewhat eccentrically, talked of Poles being slaughtered in the streets of Essex. He waxed particularly gloomy on the prospects for the continent, warning of the gathering pressure from populist forces.

The European Central Bank president Mario Draghi has warned that there are limits to the ability of the central bank to stoke growth.

He wants Europe’s governments to take up the slack by investing more in infrastructure while reforming sclerotic labour markets.

Such reforms are being stymied by opposition from the street led by union leaders while the capital rich countries stubbornly refuse to adopt Keynesian policies.

Europe remains stymied and as a result, the 52% of British voters who backed ‘Leave’ have been given little reason to rue their decision.

The real fear is that those in Europe’s governments, particularly in its Franco-German heartland, who favour a narrow, deeper EU, will seek to punish Britain while promoting greater centralisation of decision making, may be gaining the upper hand.

If this is the case, we in Ireland have reason to be quite concerned.


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