The Brexit debate
It’s more than a year since the UK triggered Article 50, requiring the country to leave the EU by the end of March 2019, and almost two years since the nation voted to go. With the pre-referendum Leave versus Remain camps continuing to divide the UK, what are the economic and political realities of Brexit so far? And what will be the long-term impact for the UK?
These were among the questions addressed by a Barclays Private Bank panel discussion on April 24. The event helped to clarify Brexit issues and air key issues that are shaping the financial landscape and may affect Private Bank clients.
Chaired by Will Hobbs, Barclays’ Head of Investment Strategy, the discussion presented the opposing sides of the Brexit debate. Roger Bootle, Chairman of Capital Economics, argued the pro-Brexit case, while Chris Giles, the FT’s economics editor, argued in favour of EU membership.
Below are some of the key talking points from the debate:
- Treasury expectations of economic disaster have been confounded by continued,
if relatively subdued, international investment.
- Exporters may have benefited a little from the decline in sterling, and we are yet to see the anticipated stampede of companies to other shores.
- Scare stories and gut reactions on both sides have clouded the debate and are continuing to hamper a balanced view. For example, the leave campaign helped to secure the Brexit vote by claiming that the NHS could receive £350m more every week if the UK left the EU. However, others claim that if you compare the more subdued post-referendum trend in UK output growth with the previous trend, Brexit is already costing the UK economy £350m every week.
- The main sticking points and battle lines are rehearsed daily in the media. Should we be in a customs union? What will be the policy on immigration and labour movement? What will VAT look like in the UK after Brexit? What kind of free trade deals will we strike outside the EU? How will the tax position change for those who were previously categorised as non-UK domiciled? As the negotiations get further into the detail, the issues seem to be growing more intractable.
- Despite Brexit-related uncertainty, the UK’s robust and universally respected institutions and legal system, together with its flexible and still growing workforce, remain advantages in the battle to attract international investment flows.
Barclays Private Bank’s view
Immigration and labour
Migration is certainly a controversial political topic, but the economic evidence suggests that it’s a net benefit for the native population. Highly-skilled migrants bring diverse talent and expertise, while low-skilled migrants fill essential occupations for which UK nationals are in short supply, allowing nationals to be employed in higher-skilled jobs.
Moreover, migrants don’t just expand the labour supply – they may also boost labour demand, since the availability of a cheap and readily available work force believed to encourage companies to invest in the UK. Further increases in employment could then boost consumption and the demand for housing.
With or without Brexit, we may see a dramatic drop in immigration because some of the main reasons for the past influx from the EU are disappearing.
A failure to introduce transitional controls to A10 accession countries in 2004 saw migrants from the former Soviet Union drawn to the UK by the promise of higher wages; however, with income levels in Eastern Europe converging with the wider European Union, and the UK economy likely to enter a softer spell, the motivation to migrate may diminish. There is also less desire to migrate now that economic conditions have improved for many of those who were badly affected by the post-2007 recession.
For investors, the FTSE is currently hampered by its unfavourable sector composition and weakening relative profitability. With high representation of defensive industries such as pharmaceuticals and consumer staples, the FTSE tends to be left behind when animal spirits are pushing boundaries elsewhere. Still, longer-term investors who have a domestic bias could see these conditions as favourable, particularly against long-term 10-year gilts offering 1.4%.
Uncertainty remains, but the foundations are firm
The outlook for the UK economy will remain uncertain for the foreseeable future. Leaving the EU will be costly and time-consuming, but the UK’s corporate sector is adaptable and resilient. Whatever the final outcome of Brexit, in keeping with the opinion of our Brexit panellists, we believe that the UK’s solid economic foundation should inspire confidence about the long-term future.
Collaborating through events
The Brexit panel discussion was part of our growing events programme. Our aim to bring you similar events where we can discuss topical issues and share ideas and news that will help you as a Private Bank client. It’s just one of the ways we can focus on your needs, keep you informed, and above all work collaboratively for your success.