Stephanie McMahon
Head of Research
The UK has voted by 52% to 48% to leave the European Union.
Almost all economic forecasts of a Brexit predicted that the effects on the UK economy would be negative. They forecast higher costs of trade for businesses, which would reduce trade, leading to lower economic growth, and ultimately impacting on wage levels and standards of living.
The immediate short-term effect has been sharp downward movements in financial markets, pressure on the pound and negative sentiment towards property market shares (although not close to the levels seen following the GFC). That said, Mark Carney has given a considered statement outlining the Bank of England’s ability to support financial stability; which appears to have calmed markets a little. Notably he has pointed out that the capital requirements of our largest banks are now 10 times higher than before the financial crisis, with the banks stress-tested against economic scenarios considerably worse than the current one. Moreover, as a backstop to support the functioning of the markets, the Bank of England stands ready to provide more than £250bn of additional funds through its normal market operations – he has signalled a potential drop in rates and further QE. The Bank of England is also able to provide substantial liquidity in foreign currency if required.
Considerable concern is being raised regarding both UK Government debt and the UK’s large current account deficit. Whilst it is legitimate to worry, we should remember that the global economy remains in a low-growth environment, with the global supply of capital looking for a home still substantial. The UK is also not unique in terms of a volatile political environment. Indeed we should not forget that the country has fundamental strengths not common to most nations, notably strong legal institutions, the English language, the time zone, and good business and financial regulation. The global flight to safety has seen yields on US Treasuries, German Bunds and UK Gilts all fall.
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