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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.
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.