Savvas Savouri, chief economist Toscafund, says the risks of leaving are overblown…
The British economy continues to perform impressively despite the perceived “uncertainty” caused by the EU referendum – new car sales rising, consumer spending increasing and occupation growth in residential and commercial property markets robust against the backdrop of strong job creation, more than four years after the Bank of England ceased to quantitatively ease.
By contrast, the economies of France, Italy, and Spain et al, across the eurozone are being stimulated by a potent monetary cocktail.
New car sales would not be rising across mainland Europe without this stimulus, or asset prices supported.
And make no mistake, just as we saw with Japan in the middle of the 1990s with its near zero interest rate policy and the US from 2008 with quantitative easing, potent monetary medicine performed too late or for too long can lead to dangerously toxic currency consequences.
Einstein once suggested the definition of insanity is doing the same thing over and over again but expecting a different outcome.
Be in no doubt the European Central Bank’s monetary cocktail of ZIRP and QE will inevitably result in the same outcome as the earlier experiences of the Bank of Japan and US Federal Reserve.
Whenever this denouement comes is unclear (autumn 2018 is my guess) but it will, and will bring with it a new set of costly pains to all member of the European Union.
And this is precisely why I am keen we play no further fiscal part in the EU.
It is telling that for all the attention given to the pound’s weakness ahead of the referendum the historic highs being recorded in gilt prices is being overlooked.
This yield compression should encourage property investors that the UK is not suffering an evacuation of capital.
It should also be seen in the context of what property yields have to compete against; a very favourable backdrop.
And as for the pound falling by c20% in the event of a Brexit, I hardly see this as a problem for the UK improving our competitiveness, stimulating much-needed inflation and making our assets so much more affordable.
As for the most recent of the barbed political comments being levelled at those in the UK keen to “leave”, let me say this to the French economy minister: Brexit would make Britain like Guernsey, says French minister – BBC News 18 June
I have only recently visited Guernsey. I could only wish that the whole of the UK were to operate as that island does.
Let me add that at a time when the French economy is struggling with industrial unrest, is being evacuated by its prime aged adults and set to be hit by currency shocks across Europe, his economy is better spent dealing with these real problems than the ones he imagines will face the UK were we to “leave”.
For just as the UK economy has sustained growth into the referendum vote, as it did ahead of last year’s general election and the Scottish referendum before that, so I am convinced it will continue to expand were we to indeed “leave”.
…but Neil Blake, head of EMEA research at CBRE, points out the dangers
The odds against a Brexit are moving in, but even at the 2/1 being offered by some bookmakers, a vote to remain still looks to be the likely outcome of this month’s referendum. However, it would be foolish to write off completely the chance of a “leave” outcome, given the ferocity of the campaign, the closeness of the opinion polls and the concerns over the potential negative downside effects expressed by CBRE’s investor clients.
Our research tells us that more than 70% of investors believe Brexit would make the UK less attractive for investment. But what effect would a Brexit vote have on other European cities?
Most of the work done on the potential impact of a Brexit has focused on traded goods, but it is its effect on services, especially financial services, that is important for commercial property, and London property in particular. This is understandable given the importance of passporting and the eurobond trade. If international financial services jobs leave London, Frankfurt and Paris are the cities most likely to benefit.
London’s rival: Frankfurt
Although Milan and Madrid have more financial services jobs, Frankfurt is seen as more internationally orientated. HSBC has said it has contingency plans to move 1,000 investment bankers to Paris. JP Morgan, Bank of America Merrill Lynch and Goldman Sachs have also talked about relocation, but have been less specific about where.
Despite the rumoured preference for Paris among some bankers, Frankfurt, at number 18, is the highest-ranked EU global financial centre after London, according to the respected Z/Yen Global Financial Centre Index 2016. Paris ranks only 37th, ahead of Warsaw and behind Amsterdam. Despite that, there is a sense of anticipation in Paris and French economy minister Emmanuel Macron has been merrily taunting British politicians with his promise that Paris will roll out the red carpet for London bankers. Dublin and Amsterdam could come into the reckoning, too.
Despite the focus on financial services, however, evidence shows that tech companies are more concerned about a Brexit than was first thought.
One survey that focused solely on London-based tech companies found that 81% of its respondents are in favour of staying in the EU. The main reason for this result is that they rely heavily on skilled workers from overseas. They feel a Brexit would hinder recruitment and would slow their ability to move rapidly against rivals and bring talent into a competitive field.
Nor is the concern limited to small companies. Recent research in the national press has also found that five of the UK’s 14 unicorns – private tech companies with a value of more than $1bn (£693m) – are explicitly pro-EU (the rest have not come out either way).
Technology firms are at the forefront of economic growth, new technologies and international competitiveness and they attract highly skilled and sought-after people. Many of the brightest and best come from central and eastern Europe and whatever system is introduced, it will be less flexible than what we currently have.
Entrepreneurial climate
In the digital-tech world, London competes not only in terms of size, but also in terms of entrepreneurial climate. It is an attractive location for a cosmopolitan workforce. CBRE analysis shows that its nearest competitors are Berlin, Paris, Dublin, Stockholm and Amsterdam. Some of these are already competitive in terms of cost and lifestyle, and they will all be looking to capitalise on London’s problems if the UK does vote for Brexit.
It looks like CBRE’s UK investor clients might be right to worry about the effect of a Brexit, but the losses to UK investors could turn into gains elsewhere in Europe.
and Ian Stewart, partner and chief economist Deloitte, said a vote to remain won’t alleviate political uncertainty…
Until maybe a month ago I’d have backed the theory that Brexit risk goes that’s it, back to normal.
But euro-scepticism is not going away. The Scottish referendum in 2014 did not put Scottish nationalism to bed so the big stories in Europe will remain, the need for reform over the euro and migration.
A vote to stay will remove a dominant source of uncertainty for investors and corporates and that will be good in the short term for asset prices and for business confidence and their ability to take on risk. After the vote we’ll see a rally in equities and sterling as well as other sterling assets like corporate bonds.
But from a markets point the majority achieved in the vote will be important particularly a very strong vote for remain. That seems unlikely.
Even a remain vote will have a significant effect on the Conservative party. The prime minister has said he will leave before the next general election and we are now dealing with a government which has a majority of 12 but 43% of the party backing to leave Europe. Clearly that leaves scope for a period of uncertainty and will undermine government’s ability to get through legislation. That’s before you look at what the referendum has done to the key Tory contenders George Osborne, Boris Johnson and Theresa May.
And fairly soon everyone will go back to worrying about the things they worried about before the EU vote: productivity growth, pace of growth in Europe, the slowdown in China, geopolitical worries in the Middle East and Russia and elections in the US, Germany, France and the Netherlands.
Macroeconomics tells us that uncertainty leads to a reduction in risk, a pull back in corporate expenditure, greater focus on strengthening balance sheets, building up cash and reducing costs. Leaving Europe would see a significant depressant effect on gdp but the effect would depend on how quickly the government could give direction and rebuild a new environment for business. Economists at the moment are predicting growth of 1.5% rather than 2% if we leave, and 0.7% next year rather than 2%. If it’s leave the Bank of England could increase QE and use that to buy a wider range of assets, corporate bonds and more risky assets or it could say resulting high inflation is temporary and we aren’t going to let that have an impact on interest rates.
But the bookies are issuing odds of 75% chance of remain and the markets have largely priced in a remain vote. If its leave then the fall is now going to be much sharper.
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