Brexit confusion is getting worse

Tony Ward

October 17, 2016

EU Brexit European Union

Tony Ward is chief executive of Clayton Euro Risk

Given the events and sheer disarray in Parliament this week around how Brexit negotiations will play out, I’m compelled to revisit my concerns raised in last week’s blog.

I suggested that, despite some strong recent economic indicators, alarm bells were starting to ring as to where the economy might be headed in the next six months. Uncertainty, I wrote, was the main enemy which, combined with the prospect of a ‘hard Brexit’, was making businesses feel decidedly uneasy about future investment.

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I called for strong governance and confident assurances in the tricky time to come.

Well, what a difference a week makes. Sadly all things Brexit-related seem to have gone from bad to worse. I see little sign of those ‘confident assurances’ – just mixed messages and squabbling coming from Parliament, which is of little help to the markets.

Yesterday, David Smith, economics editor of the Sunday Times, echoed my sentiments when he wrote that uncertainty was set to ‘choke off business investment’ with companies becoming increasingly cautious about what and where they will invest. He rightly argues that this caution will affect levels of recruitment which will ultimately affect consumer confidence and spend. And the economy in general.

EY’s Item Club has predicted that rising inflation will undermine consumer confidence, while companies’ worries about the post-Brexit environment will hit investment. The Club, which uses the Treasury’s economic model, forecasts that business investment will drop by 1.5% this year and 2.3% next year. Hardly insignificant amounts.

Furthermore, recent figures from the Bank of England reveal that business demand fell sharply across firms of all sizes. The bigger the company, the greater the reluctance to borrow, with the fall in demand accelerating over the past nine months. According to the Bank, business borrowing is dropping because of reduced demand for mergers and acquisitions, plunging capital investment and lower demand for balance sheet restructuring. No factors addressed in the survey were pushing demand upwards.

Foreign direct investment is certainly a concern, particularly now that a hard Brexit-style departure from the single market looks increasingly likely.

Economists are understandably worried that business investment will fall sharply after the referendum as companies do not know the vote’s impact on the economy or the final shape of Britain’s trading arrangements with the EU. These figures appear to back up those concerns. Banks also said that falling commercial real estate prices have made them less likely to lend to firms in that sector, or to businesses that secure loans on property. Hopefully this won’t impact on funding for the residential mortgage market which I maintain will remain a high quality risk performer.

All very worrying.

So where do we go with all of this? Confusion currently remains the central issue. This week, The Economist states that the underlying problem about Brexit is that although voters favoured leaving the EU by 52% to 48%, they said nothing about what should replace membership. In particular, they did not vote to leave the EU’s single market, which is what backers of a hard Brexit favour.

Politics aside, I agree with this conclusion. The vote has pointed us away from Europe, but not specified the route by which we depart. And as long as confusion over what will or won’t constitute Brexit persists, damaging uncertainty will remain.