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Brexit: 5 questions for HSBC economist Stephen King

by Citywire Jul 26, 2016 at 13:36

We put five crucial questions about the impact of the UK's 'Brexit' vote to Stephen King, senior economic adviser at HSBC.

King popped into the Citywire studios to offer his view on the plight of the UK economy following the EU referendum. From the impact of the pound's heavy fall to the prospect for wages and the government's likely response, he covers the big issues in this five-minute video.

Can't watch now? Read the transcript

How bad will ‘Brexit’ be for Britain?

As far as Britain and ‘Brexit’ are concerned, the big issue is the UK’s balance of payments current account deficit. It’s about 7% of gross domestic product. That’s enormous. It’s enormous by the standards of the UK’s own history, it’s also enormous in a global context. If you’ve got a large balance of payments current account deficit, you have to fund it. You have to have people from abroad buying up your assets, and one of the main reasons foreigners buy British assets is because Britain up until now has been part of the European single market, part of a customs union. So companies invest in Britain not just to sell goods into the British themselves, but also to sell goods across the whole of the European Union. So with doubts about Britain’s relationship with the European single market as a consequence of ‘Brexit’, it is quite plausible to argue there will be less in the way of investment coming to Britain.

How will a lower pound affect the UK?

On a positive note, you would say this is very good news because it means the fall in sterling boosts exports but if companies aren’t investing in Britain in the first place to export to Europe then the chance of it having a particularly big effect are pretty low at this stage. The other effect which we saw in 2008 and 2009 when sterling last fell a very long way, is that import prices rise, headline inflation goes up, there’s no response from wages and people’s real incomes are actually put under tremendous downward pressure, and before you know it, you’ve got a significant slowdown in economic growth. A lot weaker consumption, a lot weaker investment and of course, those two things in combination mean much lower imports. So the key issue about the fall in sterling is that rather than boosting exports, it constrains imports, but only by weakening the domestic UK economy.

What does it mean for British consumers – especially ‘Brexit’ voters?

As far as people in the UK are concerned, one big issue will be what is the downward pressure coming through on wages? Wage earners are more likely to suffer than those who have significant ownership of financial assets, particularly so if the Bank of England is compelled to cut interest rates or do another round of quantitative easing, all of which tends to favour higher levels for the value of financial assets.

Under those circumstances the oddity of ‘Brexit’ is that many of those people who voted to escape are probably those most in the firing line in the event of sterling falling quite a long way.

What can the government do to alleviate matters?

The most important thing for the government to do is to try to get some clarity with regard to our future relationship with the European Union. That is going to take time of course, our resources at Whitehall are simply too thin to allow Article 50 to be triggered immediately, so it’s going to take quite a while to get those resources in place. At the same time, if they leave Article 50 for too long, than that obviously just prolongs the uncertainty. So there’s a trade-off between having the resources in place and trying to create some kind of certainty. In the meantime, what we’re likely to see I think, is greater emphasis from the Treasury perhaps, under Philip Hammond, is to think more flexibly about fiscal policy.

Once you’re at the zero rate band virtually with regard to monetary policy then maybe it’s time to think about infrastructure projects, thinking about the fact that gilt yields are very low, perhaps there’s more room to manoeuvre in terms of some kind of fiscal stimulus. So I suspect that in the meantime now and once the uncertainty of a ‘Brexit’ is completely cleared up, we’re going to see just a bit more fiscal support coming through.

What will it mean for the EU?

What ‘Brexit’ has stated more than anything else is that sovereign nations are in a sense, still sovereign, that whatever the EU does or doesn’t do, it is possible for a country to leave the EU. Now, to be fair, for countries that are in the eurozone, it’s much more difficult to leave than for the UK because the UK has its separate currency, it’s more difficult for countries that happen to be part of the single currency, but nevertheless what ‘Brexit’ reveals is there is a populist backlash, not just in the UK, but across many parts of Europe. People who fell that somehow they have missed out from globalisation, they’ve missed out from the integration of European countries, they haven’t seen their incomes rising particularly quickly in recent years, and you can see this from the perspective of political developments in Poland, Hungary, Italy, Spain, Portugal, France, the Netherlands. So all these things combine to create, I think, an uncertain situation for the EU.

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Comments  (15)

  • Donald Chan: 

    So you invited in Stephen King with his trendy haircut to tell us nothing. You could have asked him whether it would make any difference being out of the EU on HSBC's policy that it caps bonuses for its executive directors — its top management — at nine times salaries, far above the EU’s proposed cap of 2.5 times salaries. Or would it affect the US comment that HSBC Money-Laundering Controls Aren't Sufficient. What would the impact likely to be on the EU stated limit of £75,000 maximum indemnity?

    16:30 on 26 July 2016

  • an elder one: 

    and his conclusion is?

    19:56 on 26 July 2016

  • john_r: 

    5 good questions and 5 succinct and excellent answers.

    Thank you Mr King.

    23:58 on 01 August 2016

  • Doc K: 

    Excellent video, thank you.

    08:28 on 30 December 2016

  • John Griffiths: 

    Agree with Don Chan, an exercise in the b------g obvious and avoiding the sharp questions close to home. Of course we will be out of the single market and we will need to pay in various ways to get a reasonable level of access as a non-member. Payment may mean money and will certainly involve people movement!

    09:22 on 30 December 2016

  • Keith Tunstall: 

    So Stephen King tells us we should do everything we can to halt Brexit in its tracks. Write to your MP.

    09:36 on 30 December 2016

  • Robert Morfee: 

    The odd thing about Brexit is that our government and politicians across the board are fixated on the referendum and the "will of the people".

    However, their duty is to consider the national interest rather than the will of the people. We are not a democracy in the sense that the majority of the voters decide what happens; we are a democracy only in the sense that the electorate elects the people who do.

    Mr King's video shows clearly that it is not in the nation's economic interests to leave the single market. So we shouldn't do it.

    Robert Morfee

    21:58 on 30 December 2016

  • Donald Chan: 

    Not really odd, Mr Morfee. Democracy should give "the people" the opportunity to decide who rules them. You think that the national interest shouldn't encompass the will of the people?

    Mr King's video certainly doesn't show me it is not in our economic interest to leave. This is the opinion of one man on behalf of an international bank at a particular moment in time. Two points: it is not for bankers to decide how the country should be run and secondly you have a very unrealistic view of the ability of economists to forecast the future.

    10:18 on 31 December 2016

  • Roy Harding: 

    "So the key issue about the fall in sterling is that rather than boosting exports, it constrains imports, but only by weakening the domestic UK economy."

    To say that lower sterling will not boost exports is contentious.

    Mr King is also overlooking the fact that lower sterling does not just make British exports more competitive abroad it also makes imports less competitive vs home produced products.

    14:03 on 31 December 2016

  • Robert Morfee: 

    Mr Chan

    We are indeed democratic and as such we do decide (indirectly) who rules us.

    My point is that our rulers have abandoned their own judgment in favour of a simple majority of those of the electorate who chose to vote. This is a profound change, more important in many ways than the Brexit decision itself.

    Statecraft has, from the earliest times, been a matter of long term commitment by the ruler, however selected. It is a subject of study, a matter of experience and of personal responsibility for the decisions taken.

    The recent referendum, on the other hand, was an exercise of will by individual electors acting in secret and without skill or responsibility. A sound decision on an important matter touching the nation's economy and international relations cannot be expected to be the outcome. The Brexit vote does not command the confidence of a large section of the people, perhaps a majority. It is widely considered to have been a foolish and incompetent decision. If it turns out badly, whom do we sack?

    Every government for the last 50 years has taken the view that the nation's interests are served by membership of the EU. Most of the members of this government are of the same view. So long as they are in office they should stick to their principles and live with the consequences.

    The concept of a government helplessly tied to "the will of the people" and incapable of exercising its own judgment is irreconcilable with sound government. It is, alas, what we have now.

    Robert Morfee

    18:10 on 01 January 2017

  • Donald Chan: 

    Mr Morfee, thank you for your considered reply. However, it is an opinion, no more. The referendum was not a profound change. We had one in 1975. It was interesting that at that time the government saw fit to allow both sides of the argument to be put forward simultaneously while outlining its support for remaining. At that time, it was still being put forward (albeit fraudulently) that it was a "common market" arrangement. However, the EU is a project. It is a progression to a federal state (which many proponents still deny). I would certainly take issue with your support of the inestimable wisdom of the ruling elite. Trying to be brief, I would suggest that you further review the concept of "vested interests".

    20:02 on 01 January 2017

  • Caz: 

    Stephen King - Thanks for a clear explanation of the high level situation.

    On one point, I agree with Roy that he has overlooked 'the fact that lower sterling does not just make British exports more competitive abroad it also makes imports less competitive vs home produced products.'

    The exchange rate change can be a real positive for UK Producers - and if they have already been through a massive cost cutting exercise then most of the extra income can be profit. If they are importing raw materials and hit by additional exchange rate costs, they will re-negotiate contracts/look for alternative possibly UK suppliers. The system isn't static.

    08:51 on 02 January 2017

  • Donald Chan: 

    Mr Morfee, you will probably reject my contention that the constitutional arguments around Brexit have been promulgated by those who thought the wrong decision had been made, i.e. after the event. If you are convinced that the government (versus the electorate) has the skills to make the right decisions, you presumably endorse the economic analysis made by Beeching before he destroyed parts of our national rail system and Blair when he analysed the situation before invading Iraq.

    09:29 on 02 January 2017

  • Donald Chan: 

    And: “Economists are often asked to predict what the economy is going to do. But economic predictions require predicting what politicians are going to do – and nothing is more unpredictable.”

    – Thomas Sowell

    13:56 on 02 January 2017

  • Roy Harding: 

    "The Brexit vote does not command the confidence of a large section of the people, perhaps a majority. It is widely considered to have been a foolish and incompetent decision. "

    When trying to influence someone's opinion Mr Morfee it's invariably better to try and sway them with the logic of your argument. Insulting them only encourages them to oppose your view.

    15:37 on 02 January 2017

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