19 Sep 2016

Brexit Bust or Brexit Boost?

However you voted and whatever you expected or hoped for from the Brexit referendum, the initial chaos has been resolved, mostly in surprising ways.

However you voted and whatever you expected or hoped for from the Brexit referendum, the initial chaos has been resolved, mostly in surprising ways. The result was a shock to both camps. They either disbelieved what the polls were telling them, or saw what they wanted to see, regardless of actual numbers. Neither Remain nor Leave had planned for Plan B, and the ensuing turmoil triggered the greatest political storm in living memory.

It’s too soon to know how successful Theresa May and her new Government will be in the long term. But polls say most Conservative and Labour voters think she had a good start.

The polls got it right
The shock many felt that caused the chaos is a reflection of how inward looking we’ve become. The media, politicians and the Establishment mostly live and work in London, and London has become a different country from the rest of England & Wales. You can’t blame the polls for misleading us because many got it right. By the last week of the campaign it was clear it was very close and it all depended on who turned out in what number. Analysing the polls, one of MRA’s copywriters, Cathy Lynn, forecast the final result with great accuracy, and won our applause and a cake!

Groupthink grips the Establishment and national media
If you and everyone you know voted Remain, it was a shock. The national media and most economists and analysts were appalled. Afflicted by groupthink, they spread self-fulfilling panic among readers and viewers. Seen through their eyes, Britain committed suicide. Exchange rates plunged. Shares went on a brief roller coaster.

Is sterling doomed?
Immediately after the result sterling dropped sharply and then started to find its new level.

On 7th September, writing this, the pound in your pocket is worth 14% less in dollars than this time last year, and about 7% less than it was pre referendum. But sterling’s decline is nothing new. It began a long time ago as the chart shows.

Have shares been trashed?
When the FTSE100 bounced back up after its initial fall, the media said these large companies weren’t representative and the FTSE250 index of mid-sized stocks exposed to British markets was a more accurate reflection of the UK’s prospects.

Stock markets price in what investors expect the economy to do, so is that a vote of no confidence?

How did EU stocks do over the same period?

If investors are pricing in Britain’s downfall it isn’t showing in share prices.

Some bankers may move to Frankfurt, Paris or Dublin. But many pre-referendum threats to abandon Britain are being withdrawn. Siemens has backed away from its earlier warnings. “We’re here to stay.” says Joe Kaeser, Siemens CEO. “The UK matters with or without being a member of the EU.”

After the vote, a panicky CEO of one of Britain’s largest companies alarmed staff, suppliers and investors with a ‘we’re doomed’ blog. Three hours later, after a ‘get a grip’ talking to by his chairman he replaced it with a more balanced statement.

Have homeowners and homebuyers stopped buying?
Shoppers shrugged off Brexit fears and went on a buying spree in July with retail sales rising 1.4% on July 2015. They slipped back a bit in August, down 0.9% on the same month last year. Clothing did badly but food was up. Data from the credit card company Barclaycard showed consumer spending rose 4.2 per cent year on year in August, driven by double-digit increases in spending on pubs and restaurants. There were also large rises in spending at garden centres and DIY chains.

Most BMBI (Builders Merchant Building Index) Experts reported business as usual from customer feedback during July and August, coming after a strong Q2 (see reports and comments on www.bmbi.co.uk).

Some companies I talk to say the market softened before the referendum and stayed soft. Others have yet to see a change. Some – Keylite Roof Windows, Solidor, Residence Collection, Deceuninck, SWISSPACER and Brisant-Secure for example – are notching up record sales.

Economists, analysts and media assumed the worst, and many still do, cutting their expectations for housebuilders, whose shares fell off a cliff after the vote.

Steve Morgan chairman of Redrow whose shares dropped 30% has just reported a record 23% increase in profit. Redrow shares have recovered most of this and are now just 5% lower. Commenting on his annual results, he said: “Redrow experienced very little effect as a result of the Brexit vote.” Its forward order book is up 51% on last year. “Sites remain busy, reservations continue to be taken. There is a long term underlying demand for new homes following decades of undersupply that leaves market fundamentals unchanged.”

His remarks were picked up by other housebuilders who echoed his comments in a return to reality.

The fundamentals in housing, both new and existing, are very strong. They were strong last year and strong earlier this year. The point about fundamentals is that being fundamental means they don’t change much. The prospects for housing and home improvement over the next 20 years are extremely robust. We haven’t been building enough homes for our fast growing population, and the homes we have leak heat and are poorly adapted for today’s living.

Better in than out?
“The core challenge for the EU is to make it work,” says respected Financial Times columnist Martin Wolf.

In a very bad tempered referendum debate, everyone focused on the risks for the UK in leaving the safety of the EU. Remain highlighted the risks, while Leave rebutted them. Both departed from the facts when it suited their case.

But free from the distortions of the debate, the very large risks of being a member of the EU are becoming clear. The debate compared a changing Britain with an unchanging EU, which is misleading because whether we are in or out the EU is changing. It’s about to enter extremely challenging waters and must change to survive. Many of its citizens will resist that change.

Many are even more dissatisfied with the EU than Britain’s citizens, for similar reasons. They’d like to exit too.

In large scale polling early in 2016, only 50% of Spain and 47% of Germany have a favourable view of the EU (compared to the UK’s 44%). France, who we usually think of as a loyal core member of the EU, is only 38% favourable to it. Greece is 27%. Opposition parties in the Netherlands and France are actively pressing for a referendum.

Europe has a banking sector problem and it’s about to explode first in Italy. Eurozone bank shares have fallen 40% this year. The proposed solution is a banking union.

The Euro itself is a problem that can only be solved by break-up or ever closer political and economic union. Far from creating widespread prosperity the Euro has caused stagnation and massively diverging living standards. Between the beginning of 2008 and 2016, Eurozone real GDP rose by just 0.5% in total. But that conceals the widening gap between its countries: real GDP growth of 11% in Germany, stagnation in France and a fall of 8% in Spain and 11% in Italy. On the same basis, the UK grew by 4%.

Free movement of people
Construction has been feeling the slowing effects of a shortage of skilled workers. Many of our factories would stop without skilled labour from the EU and outside.

The principle of the free movement of people, one of the EU’s pillars, and the mix of large scale migration from within and outside the EU were destined to clash.

No one anticipated movements on so large a scale, or the growing inpouring from outside. The EU needs new workers for the future, but absorbing them has caused massive social problems that the EU has not tackled. It doesn’t know how to fix them, or how to control the influx.

The biggest problem is yet to come. A glance at the countries bordering the EU and the awful problems afflicting them tells you it will get worse. Poverty, drought, famine, fast growing populations, dictators, repression, civil wars, failed and failing states, and everywhere the rising tides of terrorism. They have to go somewhere. Where else will they go?

Learning to look out, not just in
Most of the world is outside the EU. That outside is growing and expected to grow faster, while the EU’s share of world GDP has been shrinking. One side effect of our membership has been to look in and treat the EU as a security blanket.

Given that the UK always intended to trade outside the EU as well as in it, how crazy was it to sack all our trade negotiators after joining and never replace them? And no one noticed? No wonder our exports have been in long term decline!

Now the decision is taken, we’re going to have to learn to look out with more conviction, not just in, and make our own way in the world. As the 5th or 6th largest economy in the world that shouldn’t be an insuperable problem.

Seen from this side of the English Channel, negotiating a trade deal with the EU seems like a road block. But seen from the other side of the Channel, the possibility of not negotiating a satisfactory one with the UK is a nightmare.

Commenting on the incompetence of EU politicians whose intransigence – in their eyes – caused the Brexit problem, and who have been threatening vengeance on the UK, the German employers’ body BDI, Germany’s leading business voice, said this: One in five of Germany’s cars go to the UK. Can you imagine what BMW or Mercedes will say to Merkel if a satisfactory trade deal isn’t agreed with an independent UK?

If you’d like help boosting your growth, call Tom Rigby MRA Marketing on 01453 521621, email mike@mra-marketing.com or follow @MRAMarketing and @wehelp_you_grow

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