By Gökhan Kurtaran
London letter, week beginning July 11

London Letter – week beginning July 11

“Signs of weakness mount over U.K. economy”

The historic EU referendum result has opened Pandora’s box for the U.K. economy. The level of uncertainty continues to pressure consumer confidence, investments and as a result growth, which was once the fastest among the G-7 countries.

Last week significant data was found through a survey highlighting worries about the economic outlook and fears over inflation. The market researcher GfK recorded the biggest slide in consumer confidence for 21 years in its one-off poll following the referendum on June 23. The group, which has been monitoring U.K. consumer confidence since the 1970s, said measures of confidence about the economic outlook, people’s personal finances and big purchases, had all fallen, according to the post-referendum poll of 2,002 people run between June 30 and July 5. The headline confidence index fell to -9 after the poll from -1 in the regular June survey carried out before the referendum. This clearly shows that consumers have pushed the brakes on spending following the Brexit.

News on the retail sector is also not so bright.  One of the U.K.’s biggest retailers, Marks & Spencer, reported its biggest fall in clothing sales in more than a decade on Thursday as its new chief executive, Steve Rowe, said confidence had weakened in the run-up to the EU referendum.

- Political cacophony is on rise

Even the biggest supporters of Brexit campaigns do not seem too willing to trigger Article 50 which is the formal mechanism for leaving the EU at a time when the EU leaders are asking the U.K. to pull the trigger “immediately” in order to end uncertainty which also weighs over the European economy. However U.K. politicians seem too busy with internal party leadership races while the markets wait for concrete signs to reach a deal with the 27 EU members.

Theresa May and Andrea Leadsom will battle it out to become the next leader of the Conservative Party after Michael Gove was eliminated from the contest. So the only certainty at the moment is that the next PM of the U.K. will be female.  

Jeremy Corbyn has suggested he will mount a legal challenge to counter any attempt to keep him off the ballot paper in a snap Labor leadership contest.

Labor’s ruling National Executive Committee is due to decide this week whether the party leader must be re-nominated by MPs in order to run in the event of a challenge to his leadership.

However, a swift and timely decision on political discussions and the leadership race in both the Conservative and Labor parties is prudent to attain a long term sustainable deal with the EU as the economy slows down, and while revenue and budgetary pressures could leave Chancellor Osborne imposing more austerity and tax increases. Osborne already gave an indicator of his policy last month following the referendum by saying tax rises and spending cuts will be needed to deal with the "shock" to the U.K. economy caused by leaving the EU.

- Growth concerns

EU countries might be more likely to leave the EU because of the U.K. referendum result, which could have a major impact on global growth, U.S. ratings agency Moody’s warned last week. The U.K. has the second largest economy in the EU, representing 3.5 percent of the global economy. Its contribution to global growth was only 0.1 percent in 2015, according to Moody’s.

Moreover, Brexit is likely to hit the U.K.’s short-term labor market bucking the trend among other member countries, which are set to return to pre-crisis employment highs, according to the OECD.  An employment outlook released Monday says the U.K.’s real GDP growth is set to drop 0.5 percentage points in 2017 and 2018 resulting in an accumulated loss of 3 percent by 2020.

“Brexit therefore represents a cloud over the U.K.’s recent ability to create jobs,” the outlook said.

- Week ahead

On Tuesday July 12, U.K. Chancellor will meet with U.S. Treasury Secretary following his visit to New York on Monday.

On the same day, the Governor of the Bank of England, Mark Carney, will also give evidence to MPs on the Treasury Committee on the July 5 Financial Stability Report.

On July 12, Deutsche Borse shareholders have until midnight to tender shares in order to receive stocks in the new company formed from the proposed merger with the London Stock Exchange. The proposed €20bn merger is expected to be complete in 2017.

On July 14, the Bank of England's Monetary Policy Committee will announce a decision on whether to raise, lower or maintain the current rate of interest. Minutes from the Committee's meeting will also be published.

Speaking on June 30 on the U.K. vote to leave the European Union, Governor Mark Carney suggested that 'some monetary policy easing' (possibly interest rate cuts or further quantitative easing) might be required over the summer of 2016.




11 Jul,2016