Perfect Storm

June 29, 2016

" A rare confluence of events that aggravates a situation drastically "

 A referendum result to quit the EU, Party leaderships in meltdown for both government and the opposition, and the Pound and global stockmarkets in turmoil...we even gave the mighty US stockmarket a punch in the ribs. Yes I think my title is well and truly qualified ! Because lets face it the UK economic situation was hardly all roses in the garden before last Thursday. 

 

Amongst all the hype and political cat calling can we begin to pull together any facts that might give us a clue as to how things move forward and what are the implications for business here and now.  

 

lets start with the UK FTSE 100. As I write this it currently trades around 6267 less than 0.6% lower than the pre Brexit level. It is well below the April 2015 5 year high of 7104 which would appear to state that the market is more worried about wider global growth and its impact for FTSE companies than the Brexit impact. 

 

What about the Pound ? Again this has been declining from its Mid 2015 5 year high of around $1.70 against a backdrop of weakening global outlook for business. In Februrary of this year the sinking feeling accelerated as first the referendum was announced and then the leave campaign wheeled out Boris and Gove. The situation here looks a little more entrenched as the Pound is 8% down against the Euro pre Brexit rate and isn't giving any strong signs of revival. It is also over 11% down against the dollar. 

 

What are the implications for business ? particularly small businesses who have less balance sheet resources to combat volatility. 

 

Exporters will get a boost no question as products will be cheaper for overseas customers. For manufacturers this will be tempered if they import a lot of their raw materials which will increase in price, so the big winners are likey to be those companies exporting services and tourism.

 

The UK is a net importer of about £20billion in food [ UK trade stats ] more than double its 1993 level and this will mean food prices will rise, the same is true of energy and Petrol and diesel. On the face of it then it looks as though consumers might see some price rises. Some of this effect on food could be neutralised by increased production in the UK as producers become more competitive. 

 

It will be cheaper for investors to buy assets in the UK so its possible we could get some more inward investment although it's unlikley this would happen with such political volatility at the moment.

 

The cost of government borrowing could fall, this is because of the increase in the price of UK government bonds, called guilts. This is happening because the fixed interest rates attached to those bonds when they were issued now look attractive to investors. This means investors think interest rates are headed even lower than the historic lows at the moment. Lower borrowing costs are a good thing..provided the economy keeps steaming along, business maintains its profitability and employment levels, meaning the tax take does not fall or the benefit bill rise. 

 

All in all are the doomsayers overdoing things ? well probably, for me the real uncertainty lies in the reaction in the European economies to any trade fluctuations caused by the Brexit induced trade deals that we strike, or any political rabbits pulled out of the hat over the next few months and of course the direction and tone of the UK government.  

 

So when in a perfect storm, hold tight, keep going and hope for the best !

 

 

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