In the wake of the UK elections, the ensuing confusion suggests an increasing likelihood of a soft Brexit, as Theresa May does not have a majority and will have to deal with the situation as it stands. However, it cannot, and will not, be quite that simple as this would mean going back on the result of the Brexit referendum.
One source of confusion derives from the fact that British citizens’ image of Europe has changed considerably in the space of a year, and according to a survey by PEW Research Center in Spring 2017, a majority of the population in the UK has a positive view of Europe i.e. 54%, or 10 points higher than this time last year at the time of the referendum.
The idea of a soft Brexit has emerged as a result of Theresa May’s losses at the recent general election. Continue reading
The referendum on Brexit was almost two months ago (June 23). We are now far from the recession that was announced in the case of a “Leave” vote. Yesterday, retail sales for July were strong (+1.4%). It is not a fracture (see this article this morning in the Guardian).
But it is too soon to rule out the possibility of a recession.
The main reason for that is that no measures have been taken to change the rules with the European Union.
Economists said that two points were important Continue reading
In this paper, Daniel Gros, wonders if the Norwegian solution for the United Kingdom is the good one after the notification of the article 50.
The author says that beyond the question relative to the free movement of people which a necessary condition to adopt the Norwegian framework there is the question of the regulation. In this new framework and to continue to have access to the single market the UK will have to follow and to adopt the EU regulation. Will it be a progress? Not sure
Britain’s Moment of Truth
BRUSSELS – Britain’s vote to leave the European Union has put the country’s role in Europe in limbo. Every day that passes deepens the impasse between the United Kingdom and the EU and makes the future more uncertain.
The EU leadership would like to move the process along and has called on the UK to immediately take steps to do so, as outlined in Article 50, the member-withdrawal provision of the Treaty of Lisbon.
Continue reading Britain’s Moment of Truth
The logic behind the brutal adjustment on property funds in the UK is quit simple.
For non resident investors, the deep depreciation of the sterling has led to lower or negative returns. At the same time the UK economic and financial environment appears gloomy and uncertain creating incentives to limit portfolio exposure to assets of this country.
The property market is a market with low liquidity even in normal time. It takes time to sell an asset; that’s a major characteristic of this market. When there are massive flows of redemption this low liquidity vanishes. What is new, is that the environment and expectations are gloomy, therefore nobody wants to invest in this type of asset. It’s even harder on this market as prices are already very high. What could be the return for a new buyer? That’s the important question. Clearly the answer is probably negative and nobody wants to take this type of risks.
Therefore property funds are not able to manage the flow of redemptions. By definition this market has low liquidity. In the current environment this liquidity has vanished. The mechanism of adjustment is blocked: lots of sellers but no buyers. That’s what we’ve seen in recent days.
There are two options: one is to let the invisible hand in an environment in which the currency will continue to drop (see here). The possibility of a run is not null in that case. It will be the role of the central bank to intervene. The Bank of England is more proactive after the Brexit and it will have to continue.
In a post yesterday (see here) I said that one major issue for the United Kingdom, after the Brexit, would be the financing of its current account deficit. The deficit is close to 7% of the GDP and it’s funding is through inflows of capital on financial markets and on real assets (companies, real estate).
What has happened yesterday on property funds (see here) is a source of concern when we have the current account issue in mind. This could be the first step for difficulties.
Capital inflows to the UK may be discouraged by a poor outlook for the economy and by uncertainties on the economic and political process of the Brexit. This is why it will be difficult to finance the current account and the risk of its unsustainability that I mentioned in the post. At the top of that you can add outflows of capital from investors who have been hurt by a severe depreciation of the sterling and therefore of their assets (in euro) in an environment of poor economic prospects.
The risk therefore is to exit from these funds and to accelerate the depreciation of the sterling, creating a dynamic of run. The role of the Bank of England and of all the central banks will be to avoid a run by managing the post referendum situation.
The current account of the United Kingdom was in deficit by -6.9% of the GDP during the first quarter of 2016. It was -7.2% during the last three months of 2015. For the UK this is an historical negative level. Even compared to other developed countries it’s huge.
Why is it important? Continue reading