9 Nov 2016: Brexit so far
On 23 June, 52% of the British population (or at least the 72% that voted) elected to leave the European Union.  The formalities of the process are still being debated, indeed the Prime Minister’s deadline of March next year for triggering Article 50 was called into question following last week’s High Court ruling that Parliament must be consulted.  Nonetheless it should be assumed that some form of Brexit will take place given the mandate from the electorate.

Many commentators prior to the Referendum had been predicting an immediate and significant negative impact on the UK economy.  We did see an immediate fall in the pound against most other currencies, with the pound falling 10% against the Euro by 6 July and 13% against the US dollar.  To date the falls have stretched to 14% and 16% respectively.  Broadly, exchange rate movements will have helped exporters but increased costs for businesses relying on imported goods.  Global businesses outside the UK (and therefore report in currencies other than sterling) will want to pass on the exchange rate effect of goods sold in the UK, as highlighted by the recent dispute between Tesco and Unilever.

The fall in sterling has boosted the FTSE100 index despite an initial 5% fall in the days following the Referendum.  Given the index comprises companies that generate around 70% of income overseas it is not surprising that the index has been performing strongly.  The FTSE250 index, comprising smaller UK-centric companies, showed a larger 14% fall in the days following the Referendum, but it too has recovered although more slowly than the FTSE100.

Post-Brexit concerns for financial services centre on the potential loss of so-called ‘passport rights’ which allow banks, asset managers and insurers to operate freely across the EU.  If the exit terms negotiated by the UK involve the loss of these rights then there will be pressure on these businesses to relocate some operations from the City to a territory within the EU.  Several large banks (eg HSBC and JP Morgan) have already publicly indicated their readiness to relocate.  If the UK does lose the rights and the sector follows through on its threat, then the Treasury could take a material hit.

Prior to the Referendum concerns for the construction industry, in particular the level of overseas investment, were highlighted by Remain supporters.  The industry, despite showing significant recovery following the recession, had already been cooling pre-Referendum and the Markit/CIPS UK Construction Purchasing Managers' Index was 45.9 in July (any value below 50 indicating contraction).  Since then however the index has rebounded to 52.6 supported by housing activity, allowing the industry to shrug off Brexit worries for now.

We have seen the Bank of England take steps to shore up the economy with an interest rate cut from 0.5% to 0.25% in August and the resumption of quantitative easing.  The effect on gilt yields, and therefore defined benefit pension deficits, has been well–reported.

The Office for National Statistics has said that “data so far have shown an economy largely undisrupted by the UK's decision to leave the EU.”  GDP growth for Q3 2016 was estimated at 0.5%, slightly lower than the 0.7% in the previous quarter.  The Bank of England improved its 2017 GDP forecast 1.4%, compared to 0.8% previously, although the European Commission cut its 2017 GDP forecast from 1.8% to 1.0% citing uncertainty around Brexit.

What can we make of all this?

Those looking for clear answers as to the impact of Brexit will be disappointed, which is hardly surprising given we do not know the terms on which the UK will leave.  Much of the initial uncertainty seems to have abated with little sign yet of any catastrophe to come, with only the current low pound as the starkest reminder of the June vote.  Clarity may also take some time to emerge given the UK has yet to trigger Article 50, or even agree on how that should be done.  

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