RS-WS1
Back To Top

Uncertainty Rules The Waves

So, that was a bit of a shock. The opinion polls showed a narrow lead for Remain in the run-up to the referendum and many of us thought the “leap into the unknown” would be too much for the undecided, and that Remain would prevail.

Most of the bookmakers also had very long odds on Brexit – and how often do those guys get it wrong? But they did, and what lies ahead is unchartered waters (to continue the analogy used by David Cameron in his resignation speech). So amid the tumultuous headlines, the decision has been made and the prevailing question is – what now?

Well, in truth, no one is exactly sure. Commentators, economists and politicians will forecast, but this outcome is effectively unpreceded – and that is the crux of the issue. Whether it’s the stock, property or currency markets, they hate uncertainty. It essentially stalls decision making and creates an environment of consolidation rather than investment and expansion.

But, in the short term, the status quo remains. David Cameron will step down as Prime Minister ahead of the Tory party conference in October and hence the Government won’t trigger “Article 50” (the mechanism that allows for a member state to exit the EU) until the new PM has moved into his or her new abode in Downing Street.

And even when triggered, the negotiation and practicalities of an exit will take around two years to work through, meaning that our exit is far from immediate.

That said, the impacts of the vote most definitely are – the FTSE began Friday by falling rapidly as the markets appeared unprepared for Brexit. The other European share indexes fared worse, which perhaps explains the language of some senior EU officials in attempting to hasten the UK’s exit.

The pound experienced a significant fall, its heaviest for 30 years, and, although recovered against the Euro, crucially it continues to weaken against the dollar (the currency which our oil is trading in, meaning petrol at the pumps will get more expensive).

However, Mark Carney’s announcement about the £250 billion which the Bank of England is prepared to inject into our Banking market will help reassure investors, along with the Chancellor’s words as regards Britain’s fundamental economic strength.

Essentially, our national bank is well capitalised to support our High Street banks should uncertainty trigger constraints in the lending markets. This is a key difference from the previous crash and should give us all comfort that our markets are in a more stable place than in 2008.

So, what of the regions? Scotland and Northern Ireland have voted to Remain and, although Westminster holds absolute authority over their respective assemblies, can Parliament ignore the democratic majority in these countries if some sort of comprise within the EU can be reached?

The answer is unknown, but there is a tenuous element of precedent on this front as the Kingdom of Denmark is a sovereign state within the EU but includes two autonomous constituent countries in the North Atlantic Ocean – the Faroe Islands and Greenland – which are not.

And what of our economic white knight, corporation tax reduction? Well, our position as the “first shore” for US FDI and a stepping stone into Europe is weakened somewhat. It may dilute our appeal, especially as our neighbours in the south will have the same corporation tax position but have the benefit of being in the single market.

It all depends on our future arrangements on trading with the EU. Either way, we are likely to experience a bit of a standstill until those investing see more certainty around the future business landscape. Whatever that landscape looks like, we need a clearer understanding of it – and quickly

By lisney
28th June 2016
RS-WS1