Following the outcome of the Brexit referendum, significant re-pricing of financial assets took place in an orderly manner and didn’t lead to a seizing up of markets and interruption of the flow of credit, notes Goldman Sachs. Huw Pill and colleagues point out in their July 29 research piece titled “Brexit fallout – Economic and political challenges for continental Europe” that the U.K. will not be allowed to cherry-pick among the privileges of EU membership without accepting the responsibilities and costs entailed.
Sharp slowdown in U.K. economic activity
Pill and team point out that despite the increase in market volatility in the immediate aftermath of the referendum outcome, the markets have continued to function in an orderly manner, partly aided by the underlying support of central banks. Though the repricing of financial assets was significant, the analysts don’t believe the repricing has led to the interruption of the flow of credit akin to what was observed after the Lehman Bros. failure in 2008.
However, the GS analysts believe the broader economic consequences of Brexit are already evident. Citing Goldman Sachs Global Investment Research data, the analysts highlight a sharp slowdown in U.K. economic activity as the rise in uncertainty after the referendum outcome has led to the postponement of investment and hiring decisions and weighed on business and consumer confidence. They caution that if the uncertainty persists, it could knock 1.5pp and 2.0pp off the level of U.K. real GDP over a two- to three-year horizon:
U.K. government could activate Article 50 of Lisbon Treaty next year
Terming the political fallout of Brexit as significant, the GS analysts point out that a key decision for Ms. May and her new U.K. government would be when and how to invoke Article 50 of the 2008 Lisbon Treaty, which provides the legal framework for leaving the EU. The analysts highlight that Britain’s unwritten constitution and the lack of precedents in the implementation of the Article underlie a few uncertainties.
Pill and colleagues highlight the uncompromising stance taken by the French government regarding the need for the U.K. to abide by the so-called “four freedoms” which underpin the Single Market contrasts with some of the language from the German government, which has struck a more cautious tone. The analysts note that some German industries such as chemicals and autos are particularly exposed to U.K. trade, while Paris has long coveted breaking London’s stranglehold on financial activities in Europe:
The GS analysts believe that after a necessary period of preparation and pre-discussion with Britain’s European neighbors, the U.K. government would activate Article 50 of the Lisbon Treaty in the first half of next year. The analysts believe that considering the bumpy political roads that Europe is set to traverse over the next 18 months, the deepening of the political integration will more likely be on pause for now:
Goldman Sachs is not alone. Oxford Economics opines in a research note dated August 19th 2016 that:
Claims that the vote to leave the EU would quickly result in a rapid deterioration in the economy have not been supported by the first official data relating to the post-referendum period. July saw unemployment fall and retail sales surge.
Admittedly, a tick-up in inflation in the same month is likely to presage a further, real income-squeezing, rise. And official post-referendum data on investment, an area arguably most vulnerable to Brexit-related uncertainty, won’t be available until November. So the waiting game continues.
Just for one example we will cite – there was fear of consumer spending collapse post Brexit but Oxford Economics notes:
A 1.4% monthly rise in retail sales volumes in July was well above the consensus expectation of growth of only 0.1% and took the annual increase to 5.9%.
In conclusion, for all now all is okay, but as Oxford notes wait for November before attempting to sleep at night and you might want to at least start looking into those doomsday bunkers.