Thursday 8 September 2022

It's the economy stupid

The economy is about to hit the buffers. Yesterday the pound sank briefly to a level not seen since 1985. It has had a torrid month, falling from $1.22 to $1.14 as the markets express an opinion about the direction this country is taking. This is a 6.5% fall in one month. The old Bank of England governor Mark Carney once said Britain was relying on the kindness of strangers, those who keep buying our companies, property and debt. Well, the strangers are starting to give up on us. This is backed up by data in the FT (no £) showing money being pulled out of UK equities (stocks and shares) at a rate.

 I quote: 

"UK savers have fled funds investing in British business, pulling £6.6bn from these assets so far this year, making 2022 already the biggest year of outflows in a decade.

 "The rout for funds with UK equities strategies in the first part of this year has outstripped the £4.8bn withdrawn in 2016, the year of the Brexit referendum, according to data from the Investment Association (IA), a trade body. UK-focused funds have recorded net outflows every year since the Brexit vote."

There are some economists (not many) who argue that our problems of high inflation and a stalling economy are not just a UK issue but are happening in other European nations too. Unfortunately the markets don’t agree. The pound has also fallen against the Euro as well although not by as much (about 3.5%).

I follow David Smith, the economics editor at The Sunday Times, who this week talked about the slump in sterling being a result of market fears. he quoted Bill Blain, a financial strategist at Shard Capital, who issued this warning last week:

“The UK is at risk of breaking its ‘virtuous sovereign trinity’ of stable politics, currency and bond markets,” he wrote. “Collapsing confidence in politics to stem the slide in sterling and thus gilts, could see the UK stumble into a sovereign financial crisis sooner than we think possible.”

Ever since the referendum the pound has struggled. Brexiteers said a cheaper pound meant a boost for exports but we see no sign of that. As the global economy returns to something like normal, plenty of countries are seeing a boom in exports. We aren’t. Recent ONS figures for June show non-EU exports actually fell!

“Total exports of goods, excluding precious metals, fell by £2.7 billion (8.0%) in June 2022, driven by a £2.0 billion (11.9%) decrease in exports to non-EU countries, while exports to EU countries decreased by £0.7 billion (3.9%).”

The fact is that exports to the EU are more difficult by Brexit and very often non-EU exports rely on EU or global imports which have been made more expensive by a devalued pound. 

This is even if our goods are that price sensitive. Germany managed to keep exports high when the Deutschmark was strong because they had products that buyers needed. Too often, we don’t.

The new chancellor, Kwasi Kwarteng, apparently had a meeting with leaders of some big banking and finance businesses yesterday where he talked about a Big-Bang 2.0 - in other words a deregulated City free for all. This was reported in the FT (no £) with this amazing revelation:

"Kwarteng urged the City leaders to come up with ideas for regulatory reform, a sign of frustration among Brexiters that the benefits that were supposed to flow from EU exit have been slow to materialise."

He asked them for ideas! It wold be funny if it wasn't true. Rees-Mogg was asking readers of The Sun and The Express without getting any workable ideas for a bonfire of red tape and now Kwarteng is appealing to bankers.

This is after six years! Brexiteers have had all that time to think about which laws are holding us back, couldn’t actually think of any during the campaign and haven’t been able to come up with any since! Yet they are still convinced we are being shackled by these elusive, unidentified regulations. No wonder Sterling can’t keep above $1.16. It can only sink further.

The monthly fall has increased the price of oil imports and everything else by 6.5%, adding to the cost of things and feeding inflation. 

Apart from all the other crises, this is one that Truss cant wish away  or control. As Margaret Thatcher once said, 'You can't buck the markets.'

Polling

As if things weren’t bad enough with another poll giving Labour a 17 point lead, the Telegraph report that the Fracking ban is about to be lifted imminently. Fracking was incredibly unpopular in the areas - manly Conservative voting by the way - where it was trialled before so I’m not convinced it’s a vote winner in any case. It looks like policymaking on the hoof.

Also, on the eve of the Rejoin March in London there is some fascinating polling by Redfield & Wilton showing a 54% to 46% lead for joining the EU and they delve quite a bit further into the reasons people give for this apparent change of sentiment.

There are still thought to be some positives to Brexit, although they are falling while the negatives are increasing particularly around the cost of living and trade.  


There is no way we are going to see any improvements in the next 12 months and things are going to get decidedly worse.

Liz Truss was toast even before going to Balmoral.  Now it looks like Brexit is toast as well.

I note Truss has decided not to fill the Brexit Opportunities minister job vacated by Jacob Rees-Mogg who clearly failed to uncover any opportunities since being appointed in February. No surprises there.

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