Investment Clock insights

'Brexit' update

Ian Kernohan

August 12th 2016

In the immediate aftermath of the Brexit vote on June 23, we took the view that this event did not represent a systemic shock to the global economy, with any economic fallout largely confined to the UK.  Looking back, we remain comfortable with this view, while being mindful that there are a number of political events coming up in Europe, where the Brexit legacy is not exactly helpful.  So far, there is little if any evidence that the Leave vote has had a material impact on economic activity outside the UK.  Even in the UK itself, at the heart of the storm, the impact does not appear to have been quite as severe as many people feared, although there is no official economic output data covering the post Brexit period, so this will only become clear with time.  The Purchasing Managers’ Index (PMI) surveys (see chart) suggest a dramatic turnaround in economic activity, however many companies have signalled only a limited impact on business, in reports to their shareholders.

At the Bank of England, the Monetary Policy Committee (MPC) reacted to developments by pushing monetary policy to limits not thought possible just a few years ago.  The base rate has been cut by 25bp to 0.25%, with a majority of MPC members supporting an even lower rate, ‘close to but a little above zero’.  A new ‘Term Funding Scheme’ has been introduced, to ensure that lenders can access funding at these very low rates and pass on the benefits to their customers.

Such monetary largesse should help stabilise the situation in the near term, however easier monetary policy is a necessary but not sufficient condition for an improvement in UK economic growth prospects.  Much will depend on how far the new government steps away from existing fiscal plans, with talk of a new “Industrial Strategy”.  Looking further ahead, by far the most important influence on the UK economy will be the shape of the new trading arrangements with Europe and the Rest of the World.  There are a wide range of possible outcomes here, and it is still very early days.  Much will depend on how far the UK remains “open” to trade and investment, in a post Brexit world.

The value of investments and the income from them is not guaranteed and may go down as well as up and investors may not get back the amount originally invested. The views expressed are the author’s own and do not constitute investment advice.