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Half full, half empty? Michael Wilson considers the prospects for pre-Brexit Britain.

  • By Sue Whitbread

Another foaming pint of Olde Wallop for Michael Wilson, Editor-in-Chief of IFA Magazine, as he looks at the prospects for pre-Brexit Britain

“The thing is,” said my mate Steve, as he stared gloomily into his fourth pint, “this Marine Le Pen woman might actually do Theresa May a favour.”

I opened my eyes, perhaps a little more widely than was really called for at that late hour in the Dog and Duck. Of all the great things I value Steve for, his political acumen is not one of them. But on reflection, perhaps he had put his finger on something important?

You see, Steve and his wife both voted for Brexit last June, after some hesitation. They’d finally been convinced that getting £350 million a week back for the NHS was quite an attractive prospect, and house prices were getting too stupid for young people to afford, and it was time to get our country back. Etcetera. No, the connections weren’t that clear to me either, but you know how it goes as closing time approaches. Either way, 52% of the electorate agreed with him.

Domino theory

So, nine months on, and with a hefty dose of buyer’s remorse, Steve was trying to think out the least-worst-case scenario for Theresa May as she prepares to battle it out with the other 27 EU members. And his thinking went like this:

Suppose Madame Le Pen gets the French presidency in early May and starts dismantling France’s entanglement with the Eurozone, while at the same time the Italian banking system falls over and the far rightists assume the high ground in Holland? Throw in a regionalist revolt or two from Spain, and a few more nazi taunts from Greece, and that would leave the EU facing a schism which might – indeed, probably would – drive a wedge between the provident north and the profligate south. It would certainly push Germany into a corner, which might even give legs to the idea of a two-speed Europe with a two-layer currency.

And the impact on Article 50 and Britain’s EU membership? Which EU would we be talking about, then? The one that sells more cars to Britain than anywhere else in Europe, or the one that can’t tie its own political shoelaces? (Yes, Steve’s fourth glass was nearly empty.) The one that would miss Britain’s net contributions to the joint European Budget? Wouldn’t all this give us much more negotiating clout than the Remoaners have been reckoning on? And might the whole Article 50 thing, in fact, be a historical irrelevance?

Back to basics

A tempting thought, for me at least. But I digress. The two most important trends of the last nine months in Britain have been that the majority of the remaining Brexit doubters have sat down and accepted that we’re going to leave the EU. Although the plunge in sterling that followed Theresa May’s ‘hard Brexit’ speech in February may have given some back-biters a kind of dark satisfaction. (My old granny used to say that the cruellest little words in the English language were “I told you so.” Here at IFA Magazine, we’re getting more positive assessments from the analysts these days, and who would we be to ignore them?

The other major trend is that both the economy and the stock market have done better than many of the Remainers expected. Which has been a source of some considerable comfort to the Leavers.

We might want to qualify that claim with the observation that the sharp increase in consumer activity is only to be expected if the public expects prices to rise sharply before long. (Ironically, the exact opposite of the deflationary worry that keeps Japanese or German economists awake at night.) The Remoaning Minnies may try to draw some comfort from the news in early March that retail footfall is indeed going off a post-January cliff – or at least, declining to a five-month low. As Larry Elliott wrote in the Guardian: “It is…likely that the prospect of higher inflation prompted consumers to buy big ticket items in 2016 that they would otherwise have put off until 2017. To that extent, some of the growth seen last year has been borrowed from the future.

We might also want to observe that a weak pound has prompted a surge of interest in London-listed stocks from foreign investors who know a good investment when they see one. On that reckoning, much of 2016’s 15% growth in the FTSE-100 was based on market and fiscal grounds rather than on any particularly solid economic underpinning. A cue for more sniggering from the Remain wing, which also noted with some satisfaction that the index had stalled and struggled through late February – at a time when the Dax was climbing steadily.

Solid enough

And yet, none of this quite addresses the issue. On the market valuation side, UK equities are still considered cyclically cheap – especially by US standards – and yes, there is a good chance that forward valuations may remain in bargain territory, especially if the dollar rises when the Federal Reserve jacks up interest rates.

And on the economy side – heck, we’ve just seen our OECD forecast for 2017’s GDP upgraded to 1.6%, compared with just 1.2% in last November’s assessment. That shouldn’t surprise anyone who observed that last year’s growth was around 2%, and that the Bank of England itself is forecasting 2%. Or that both the BoE and the OECD say that the impact of Brexit in 2017 and 2018 will be less than expected.

Ah yes, say the sceptics, that’s all very well, but Brexit doesn’t happen until 2019, which is quite a different matter. And by that time we can probably expect that international businesses will be rejigging their investment plans so as to accommodate the possibility of damaging trade tariffs and disputes.

Wrong place, right time?

The Vauxhall takeover by France’s PSA looks like bad employment news for the car plants in Ellesmere Port and Luton. BMW is talking about building its electric Mini in Germany, not in Oxford. The Confederation of British Industry has pleaded with the Prime Minister for more clarity about her ‘hard Brexit’ plans, so as to reduce boardroom uncertainty about how best to prepare its members’ investment budgets. Nobody wants to build a factory if it’s likely to be disadvantaged by trade barriers or by poor international relations, or by punitive taxes that might mean Slovakia becomes a cheaper manufacturing option.

And have we even considered the likely impact on banks? Yes, of course we have – there can hardly be any institutions that aren’t quietly preparing the parachutes in case we lose the European banking passport that goes with the Single Market. Without it – or something rather like it – British institutions would be quite literally not entitled to pitch for European business on the same terms as they do now.

That, of course, is a probable overstatement. Mrs May is under no illusions that Paris and Frankfurt and Amsterdam and Luxembourg would all love to have London’s slice of the European pie. And that Donald Trump’s America would be very likely to at least consider re-offshoring any of its London bases that it still wanted to retain any of its fractious dealings with the Old Continent. The PM doesn’t doubt, either, that banks have responsibilities to their shareholders that transcend their obligations to their host states. And that’s why she’s keeping her cards so close to her chest.

Chancellor Philip Hammond campaigned mightily for Britain’s continued admission to the banking passport – even if it cost the country billions in back-scratching deals of one sort or another. Officially, he was squashed by the PM in January, when she said that she wasn’t willing to do anything that might mean a more relaxed line on immigration. (A key element of the Single Market, on which the banking passport then rests.) But since when? Whaddayaknow, the government has been making assurances since the start of March to the effect that current EU nationals in the UK will suffer no disqualification or disadvantage. Is this the start of a tactical softening? We can only hope so.

Upstairs, downstairs

At the time of writing (mid-March), there was no getting away from the impression that Mrs May was picking up some tricks from the Donald Trump style of politics. Lay down a thundering barrage of uncompromising statements; let Boris Johnson add to the confusion with a rattle of random machine-gun fire from the right flank; and then allow your team to intimate that you might just be prepared to negotiate something a little more accommodating if the circumstances are right. It’s the Art of the Deal, you see. But until then, Brexit means Brexit….

So far, the response from Brussels has been uncompromisingly blunt. Michel Barnier, the EU’s main Brexit negotiator (and a former French foreign minister) is playing for high stakes. And Francois Hollande, the present French president, is probably aiming to pitch for his job when he quits, so that won’t be much better. The Poles tried to dump the straight-talking Donald Tusk, the president of the European Council, with somebody tougher. (And were expected to fail.)

And Germany’s chancellor Angela Merkel, who has more than most to lose from Britain’s withdrawal, dare not open her mouth until the late autumn when her general election is out of the way. (She is expected to win, but not by much.)

All the while, the House of Lords is insisting on being allowed to inspect and ratify any detailed agreement that the PM and her team might reach with the EU. At the time of writing, the main point at issue seemed to be the treatment of EU non-nationals, but the general impetus was that the legislation authorising Theresa May to invoke Article 50 would need to carry a rider requiring that the final terms of the UK’s withdrawal from the EU should be put to separate votes in the Commons and in the Lords.

Would that amount to a veto? In all probability, no. But it’s indicative of the current mess that nobody seems quite sure. Either way, Lord Heseltine, an arch-Europhile Tory who supported the Lords amendment, has been sacked from his other role as a government adviser on regional growth. Smack. Now sit down and shut up, Michael.

Bonnie Scotland

So much, then, for the United Kingdom as a whole. But, as is fast becoming clear, the northern territories have ideas of their own, and they don’t involve an exit from the EU. Westminster is currently trying to make light of Nicola Sturgeon’s heavy hints that Article 50 will trigger what’s being called “Indyref 2”, and that Edinburgh wouldn’t dare attempt an act of secession. It may yet be wrong. But whether such an act could succeed would be another matter.

The reason, as you might expect, is that the continuing slump in oil prices has dealt a severe blow to the country’s dominant industry at exactly the same moment when its banking industry is also struggling to make headway. According to figures published by the Scottish government in January, onshore GDP grew by only 0.2% during the third quarter of 2016, against 0.6% for the UK as a whole and rather more than that for England and Wales.

Expressed as a year-on-year comparison, the improvement was a only 0.7%, against the UK-wide figure of 2.2%. Unemployment of 5.1% compared badly with Britain’s overall 4.7%, and the fiscal deficit of £14.8 billion in 2015/16 represented 9.5% of GDP, compared with 3.7% for the UK as a whole. On that basis alone, Scotland would crash the Eurozone’s tests for membership of the Euro club pretty badly, and you can’t get into the EU these days without joining the single currency.

But Ms Sturgeon is in a cleft stick of a different sort. Only last August, she said that leaving the EU would cost Scotland £11.2 billion a year. Not, please note, because of exit penalties but because it would lose so much trade that currently goes out to Europe through its UK membership. Some of it very probably through the banks that currently bring in £8 billion a year and employ one in twelve Scots.

There are those, of course, who say that Scotland within the EU will actually help to support the Scottish banks and may even hoover up institutions currently based in London. I’ll take that with a wee dram, if you don’t mind. Good gracious, closing time already?