Bye, Bye, Britain: Pain Ahead for the UK and GBP
There are a few special days in my career that stand out because of the historical events I was privileged to live through and comment on – memorialize, perhaps – to my colleagues. The two that stand out most: I remember the morning meeting I gave on 10 November 1989, the day after the Berlin Wall fell. Luckily in those pre-internet days I had a copy of Trotsky’s The Russian Revolution and so could get the quote right: You are bankrupt, your role in history is played out. Go out where you belong – onto the dustheap of history. I remember the day Barack Obama was elected; choking back emotion, I quoted to my colleagues the words of Martin Luther King: "I have a dream that my four little children will one day live in a nation where they will not be judged by the color of their skin but by the content of their character.” I thought Obama’s election signaled that that day had arrived in the US. How wrong I was.
But what am I to say to my colleagues today, Brexit Day? A day nearly as heavy with historical import, but for me, totally bereft of the hope and vision of a new, better future that these other landmark dates were imbued with. On the contrary, this seems to me to be a country rejecting the future and turning to a mythical past, and in the process committing economic and political suicide: the impoverishment of the people leading, most likely, to the dissolution of the centuries-old alliance among the several nations of the United Kingdom. This time the map is being redrawn out of fear, not out of hope.
What can I say this time except to quote the Welsh poet Dylan Thomas: “Rage, rage against the dying of the light”?
Even the British government admits it’s going to be bad, bad, bad. You can see a PowerPoint presentation giving their estimates for the impact of Brexit. Or you can read a more detailed analysis here.
Here are some of their estimates.
The best-case scenario they have is that UK per capita GDP will be more or less unchanged to down 1.3%-1.9%. That’s the best case.
Or how about this encouraging table, where the best-case scenario is -0.6% on GDP and the worst case is -9.3%?
I must admit, I didn’t read all 83 pages of this report. Nonetheless, in my brief examination I did not find one single instance where the Government predicted that the UK economy would be better off by leaving the EU.
The Brexiteers sold the country a lie that freed from the shackles of EU membership, Britain could forge new and better trading arrangements with its trading partners. Hah! If you believe that, then I have a bridge to sell you.
On the contrary, a recent article observed that Trump is threatening a damaging new trade war with the United Kingdom after Brexit. “As (UK PM) Johnson prepares to seek new trade deals outside the EU, the Trump administration is poised to take advantage of the UK's vulnerable new position on the world stage,” the article says. “In recent weeks, the president and his allies have issued a series of threats to the UK on everything from telecoms to vehicle tariffs to security cooperation…” To me, this report calls into question the whole economic logic of Brexit, if indeed there were any to begin with.
The problems that Britain will face working out new trade arrangements with most of the countries in the world is just one of the reasons why I am structurally bearish on GBP until further notice.
The country already has one of the largest current account deficits in the world relative to its economy. What do you think will happen once Britain gets on worse trading terms with virtually every country on earth? Will nostalgia for the Commonwealth make up for reduced access to the Continent?
Britain’s been able to finance this deficit for years thanks to net inflows of direct investment and portfolio investment. But the basic balance has turned negative as first direct investment, then portfolio investment dried up in the face of Brexit uncertainties. Next comes disinvestment.
Meanwhile although nominal yields on gilts are still (just barely) positive:
...the real yield on gilts is among the worst in the G10. And set to get worse if the currency falls, pushing up inflation, while the Bank of England has to cut rates in order to support the economy.
There will of course be occasionally uptrends within the overall downtrend. It’s a truism in markets that nothing moves in a straight line. But as growth weakens, the Bank of England is likely to have to cut interest rates to support the economy even as the country’s primary balance moves more into deficit (larger current account deficit, less money coming in on the financial account). I suspect that by the time the UK and EU settle on their long-term arrangements at the end of this year, we may finally be able to hold that “Parity Party” that traders briefly prepared for in 1984.
If not GBP/USD parity, then perhaps EUR/GBP parity.
Even granting that economics isn’t everything, especially in politics – national pride and independence are important too – but will Britain really be prouder to be poorer and smaller? The local assemblies of Scotland, Wales and Northern Ireland all refused to ratify the Withdrawal Agreement. The Scottish National Party is already angling for another independence referendum, while the December General Election changed the tone in Northern Ireland, resulting in more nationalists (those who want to unify Northern Ireland and the Irish Republic) than republicans (those who want to remain part of the UK) elect for the first time. On the other side of the border, in the Irish Republic, the opposition Sinn Fein party has pledged to press London for a vote on unification if it gets into power. “It is game on for unification and I think the thoughtful thing, the wise thing to do, is to plan from now,” said party leader Mary Lou McDonald.
God Save the Queen, because Her Majesty’s Government can’t or won’t.
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