British economy falls behind since referendum

The comparison of industrial activity in the European economy is very instructive when we consider the period after the British referendum on Brexit.
Despite the acceleration of world trade, British industrial production is lagging behind the various countries of the Eurozone. This is shown in the graph below.
The profile of industrial activity in Italy flies across all the major European countries, while the United Kingdom is clearly lagging behind, especially since the beginning of 2017. The gap is significant with the index of the euro zone as well as with France, Germany and Spain.
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Soft Brexit …or how to do a swift about-turn

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

Brexit has not started yet

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

Britain’s Moment of Truth

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

British households are not happy

After a vote, people are generally happy with the result. That’s what we see in France after a presidential election. With a new president there is a new situation and a majority of people think it will be better in the future. That seems logical and easy to understand.
British are different. They have just voted for a major change in their institutional framework as they want to exit from the European Union. We can expect that a majority of British people will be happy with that.
This is not the case. In July, the households’ confidence index drops deeply by 8 points (deepest drop). Clearly there is no enthusiasm for this fracture.
More than that, expectations on the economic activity for the next 12 months is trending downward dramatically. There is a risk of self prophecy for a recession. The message was that a Brexit could lead to a recession (see economists). The Brexit has been voted and people are worried by this perspective. They will adopt a lower profile for their expenditures because of the uncertainty created by the risk of recession; they prefer to save. But as demand addressed to companies will be lower, the probability of a recession is high.
UK-2016-july-condconf-expect ecoact12m.png

Brutal adjustment on property funds in the UK

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.