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Britain is out. Turn off the lights.

Britain’s vote to exit the EU may turn out to be a vote for a recession, and for economic pain that will be felt in Canada too


 
A Brexit supporter holds a Union Flag at a Vote Leave rally in London, Britain June 4, 2016. (Neil Hall/Reuters)

A Brexit supporter holds a Union Flag at a Vote Leave rally in London, Britain June 4, 2016. (Neil Hall/Reuters)

One of the few bright lights in the world economy just went out.

It took some time for the United Kingdom to get going again after the financial crisis. But through 2015, it was the only country in the Group of Seven’s rich industrialized nations to post economic growth in excess of two per cent for three years in a row. The City of London—the world’s dominant financial centre, no matter what New York might say—had just restored all the banking and insurance jobs it lost during those dark days of 2008 and 2009. Exports of goods were at record levels. Britain was getting its mojo back.

You can forget all that now. A narrow majority of British citizens voted on June 23 to leave the European Union. The decision may bring relief from the meddling of Eurocrats in distant Brussels. It may even empower Parliament to slow immigration, as advocates for leaving claimed. And there is little doubt it will cause economic damage, according to almost every serious economist who took the time to study the implications of Brexit. (And there were a lot of them.)

David Cameron on Brexit vote: ‘In these islands we trust the people’

Already, the fallout has begun. As the votes were being counted and it became clear the Leave side was receiving more support than expected, the British pound went into freefall—by the time the Brexit decision was called, the pound had shed 10 per cent of its value against the U.S. dollar, falling to its lowest level since the mid-1980s. Meanwhile, shares in Asia plummeted and analysts were forecasting that when the U.K. stock market opens, the FTSE 100 index could drop by between 12 per cent and 19 per cent. Oil prices were also hammered, with West Texas Intermediate crude down six per cent to US$47.15 a barrel. “We will enter a new era of vulnerability until these difficult negotiations are complete,” said Panicos Demetriades, an economics professor at the University of Leicester.

Markets may right themselves in the days ahead. But negotiating the divorce could take a decade: at least two years of wrangling under Article 50, the escape clause in the EU’s founding treaty, and then many more years to extricate Britain from all matter of trade deals, regulatory arrangements and the like. The uncertainty of it all will kill business confidence and deflect international investment. Big global banks such as JP Morgan Chase and Citibank have already warned they will slash tens of thousands of jobs because they no longer will be able to adequately serve their European clients from London. British exporters could lose the preferential access they have with dozens of countries that have negotiated trade agreements with the EU.

Scotland’s Nicola Sturgeon on Brexit vote: ‘We do not want to leave the EU’ 

It’s entirely possible the people of Britain have just become the first in history to vote for a recession. At a minimum, they have curbed their country’s short-term economic prospects. The International Monetary Fund said earlier this month that the U.K.’s gross domestic product was on track to grow 2.2 percent in 2017. Brexit could force a revision to 1.4 per cent under a best-case scenario to a 0.8 per cent contraction if things go really bad. And that is to say nothing of what might happen to the EU, which, even without Britain, boasts a market equal to that of the United States. “We are of the view that if the U.K. votes to leave, and does in fact leave, then the EU will be poorer, smaller, less influential, and possibly less stable,” said Fergus McCormick, the top analyst at DBRS Inc., the Toronto-based credit-rating agency.

Explainer: So Britain has voted for Brexit? Now what? 

Should Canada and the rest of the world worry about a shrunken Europe? Some say no, not really. Benjamin Tal, an economist at CIBC World Markets, advised his clients last week to think of Brexit like Y2K, the phantom millennial computer bug that turned into one of the biggest non-events in economic history. Tal even reckoned there would be some “buying opportunities” in the aftermath of the markets’ obligatory slump following unwelcome news. “The U.K. will not roll over and play dead after a Leave victory,” Tal said. “Both the EU and the U.K. have strong incentives to renegotiate a trade deal.” The U.K. is Canada’s third-biggest trade partner after the United States and China, yet it represents only about three per cent of exports. This implies, for some, that a recession in Britain would do little harm to Canada, whose fortunes are far more tied to U.S., an economy that is set to surpass the U.K. as the G7’s new growth champion.

The trouble with the sanguine view is that global financial markets leave few places to hide—and there are wolves prowling. In 1992, George Soros made his name by winning a game of chicken with the Bank of England. He bet against the pound until the central bank gave up trying to protect its value. Soros predicted this week that Brexit would cause the currency to collapse by as much as 20 per cent. If he is correct, life in the U.K. is about to get significantly more expensive.

David Cameron is Brexit’s biggest loser

Britain imports considerably more than it exports, suggesting, among other things, that it has lost the capacity to supply itself with the basics of daily life. A weaker currency is going to make those things more expensive. Soros is betting that inflationary pressure will keep the Bank of England from cutting interest rates to boost economic growth because the central bank is obliged to contain inflation before it does anything else. “Today there are more speculative forces in the markets that are much bigger and more powerful,” Soros wrote in the Guardian. “They will be eager to exploit any miscalculations by the British government or the British voters.”

Financial markets are fragile. Bank of America economists said shocks such as Brexit cause more volatility than used to be the case because banks and other financial institutions are less keen to circulate risky assets. The Bank of Canada also noted that in its latest assessment of the financial system,  a lack of “liquidity” was one its bigger concerns. That matters because banking is contingent on lenders having access to cheap collateral such as bonds. If bankers are scared, they will demand higher interest rates. Borrowing costs rise across the board. If they rise too much, or if bankers get too scared, the financial system will seize like it did during the financial crisis.

The last thing Canada needs right now is higher interest rates. The Bank of Canada has been trying to coax companies to invest with ultra-low interest rates for years, with little success. (There also is the matter of record household debt and the risk of housing busts in Toronto and Vancouver. Higher borrowing costs increase the threat of a wave of mortgage defaults.) The other reason Canada should worry about Brexit is what it could mean to its largest trading partner. When investors get nervous, their favourite haven is the U.S. dollar. A stronger currency for an extended period would hurt American exporters and reduce the profits on the country’s big multinational companies’ overseas sales. That likely would curb U.S. business investment, which Bank of Canada governor Stephen Poloz has said repeatedly is key for boosting Canadian exports.

For the record: Mark Carney on Brexit results: ‘We are well prepared for this’ 

Volatility in Europe would also spread to Asia. Japan’s currency is also a haven. Yet its export-dependent economy is already weaker than Europe’s and a spike in the value of the yen would make things worse. China, the world’s second-biggest economy, could be in trouble on multiple fronts. Europe is a big customer and demand surely is about to slow. Volatility in currency markets could cause problems because Beijing sets the value of the yuan against a basket of the currencies of its major trading partners. Weaker demand for exports will raise new questions about the Chinese government’s ability to meet its growth target of about 6.5 per cent. The other economies of Asia are highly geared to China, so weakness there means weakness in South Korea, Australia and other countries in the liveliest corner of the world economy in recent years. “A prospective slowing in the already torpid pace of global growth is hardly welcome news for a small open economy like Canada,” said Warren Lovely, an economist at National Bank Financial.

In other words, the people of Britain have not only voted to make themselves poorer in the short term, they made life harder for the rest of the world—including Canada.


 

Britain is out. Turn off the lights.

  1. This is a victory of the common man against the uber-state; of British Liberty against the tyranny of the bureaucratic state. Bravo for England.

    • What an idiotic idea. The common man who wants to get poorer. The world needs more bridges and working together not division and hate.

      • You are absolutely correct Bill.
        This is a victory for the average Joe against the financial and political elites who see the EU as giant trough for their snouts. The EU used the common currency as a Trojan horse to impose political control over the wishes of Europeans.
        Calvin’s vile response is the typical personal response from someone who has lost the argument but believes in his arrogant assumption that he is smarter that everyone else.

        • Yungphart you just proved my point, thank you. A united world is far better of than a divided one. But people like you and those that would subject the world to a Trump presidency don’t get it. We are all in it together and need to work together toward the common goal for humankind.

          • “United world”? Under the ideologically incompetent buffoons that have resulted in this populist backlash from the hard right and hard left.
            I’m afraid you live in a word of unicorns and rainbows. You are one of the useful idiots used by those who have created this problem. Just look at what these ideologically hypnotized simpletons have done to Ontario. I find it very difficult not to label you as a typical left leaning Canadian moron.
            Your naïve concern for humankind displays a pathetic sanctimonious personality disorder not uncommon with urban Canadians.

  2. The common man in Britain is no smarter than the common Trump supporter. Gullible and full of fear the people of Britain have just launched the world into another great recession… yikes

    • If this causes a global recession, it is only Britain’s fault insofar as they supported EU membership up to this point. Read Nassim Taleb’s (brilliant) books Antifragile and Black Swan – he goes to great lengths to demonstrate the ways the globalized world is more fragile and more risky – not less.

  3. A giant middle finger to the forces of globalism. The first of many I hope. Those forces haven’t been making the world better, they’ve been making it increasingly interdependent and fragile. This just might cause a global recession, though that is far from certain at this point. Is that a good thing? No. But designing an economic system where formerly independent countries are so dependent on one another that they can’t even leave an increasingly stifling supra-national political arrangement without causing global economic shock waves wasn’t so smart.

  4. Now we just have to get rid of the United Nations and all will be good.

    • Yes Lespaul and while we are at it we could go back to the world pre WW1, except when things ignite it will be nuclear.

      • Calvin,

        You must get all your news from the CBC, Toronto Star and the newly left leaning McLeans.
        Shouldn’t you be over at the Guardian with the other useful idiots?

      • So far on almost everything from the dot.com bust to the housing bust to global warming the ‘experts’ have been wrong. They couldn’t even explain why the stock market was surging in recent weeks.

        • @Maureen55: And so far, on everything from climate change to world politics, the boys at the bar (hic!) are the real experts.

      • We had a UN prior to WWII. It was called League of Nations. It didn’t help. Just because we renamed it the UN after WWII doesn’t mean it worked any better. WWIII never happened because whenever things got heated, President of the US and Premier of Soviet Union talked to one another directly, circumventing the UN mechanisms completely. Had the world relied on UN mechanisms, we’d have had WWIII before 1980.

  5. “…think of Brexit like Y2K, the phantom millennial computer bug that turned into one of the biggest non-events in economic history.”

    The threat of Y2K was real. Fortunately the IT industry pulled together and fixed the problem. Brexit is more like what would have happened if the Y2K problem was ignored.

    • except when y2k happened the currency didn’t just lose 10 percent of its value in a matter of hours.

      • Let’s look at what happens over the next year, because the stock market is not the best indicator of anything.

  6. When you allow the inmates to run the asylum – as Cameron did with this referendum – this is what you get.

    You will also get Donald Trump for President.

    • This demonstrates how poor Cameron really was as a leader. To stay or leave the EU is a VERY complex matter and not something you decide with a referendum. Those elected, aided by their bureaucrats, were
      “hired” to analyze and decide on such matters.

  7. Contrary to the headline “Britain’s vote to exit the EU may turn out to be a vote for a recession…” it MAY also turn out really well for Britain.

    The only thing that is clear is that the experts and elites basically lost since they couldn’t, through their fear mongering, convince enough people of their cause.

    Everyday people are fed up with elites and experts telling us how to think, live and feel. People are fed up with it!

    • @Maureen55: Those nasty elites with their fear mongering. Like you, I much prefer the fake “average people” (like Boris) who used outright lies and deception to convince people of his cause. How Trump-like.

      • Hahaha, joking right? I assume you can both read and comprehend so possibly you absorbed a little of “project fear” in which the ruling elite said nothing positive at all, just tried to frighten the children with grim tales of war, pestilence and, gasp, more difficult access to French villas. Trouble was, the British people are not all children.

        • Indeed. I’m old enough to remember Joe Clark warning us of a resurgent FLQ and the breakup of Canada of we voted against Charlottetown, something our Constitutional “experts” negotiated on our behalf and allegedly for our benefit. We voted that sucker down by almost 60%, and in every province outside Quebec. Six years of Constitutional wrangling by our resident politicians and their “expert”, advisors and we threw it in the garbage can without a backward glance. Joe’s warnings were ridiculed at the time, and are in fact ridiculous a quarter century later.

          • Actually, a number of provinces did vote ‘yes’ in the Charlottetown Accord referendum. Of note, Quebec voted ‘no’.
            Also of note, the ‘yes’ side outspend the ‘no’ side by almost 13 to 1, yet still lost.

            At any rate, the point is taken that in these types of things, everyone exaggerates the benefit of their side winning and the harm of the opposing side winning. And nobody really knows how things will play out in the long run.

    • Just as likely they voted for a reversal of history – now that votes not violence determine outcomes. Scotland will become Scotland again, Ireland will be reunited and, after some nastiness, Gibralter will return to Spain … that leaves England (and Wales although no one takes much notice of Wales) as an EU outsider with less connection to the EU than Norway. Some have suggested that since the UK is the largest single EU trade partner with Canada – accounting for 39% of Canadian exports and 16% of imports to and from the EU – this, they never say what ‘this’ is but it could be the self-induced British recession, could hurt Canada’s trade; perhaps someone should check to see how Canadian trade is divided between member states of the UK. This is overly simplistic (and perhaps a bit of colonial toadying) as is the term Britain: Scotland and Ireland may not be entirely lock-stepped to England, particularly if they separate and remain within the EU. One Toronto rag opined that the English separation from the EU could impact Canadian companies that work through England; somewhat insulting to Canadian companies, assuming that they couldn’t possibly operate in French or even German (even though more than 450,000 Canadians speak German and over 10,000,000 speak French).

      • Yes, Ulster & Scotland will probably be gone, but Gibraltar’s return to Spain is no more likely than the Falkland’s return to Argentina. It will be 100% up to the residents living there. And the residents are British, and will remain so. In fact, with EU membership gone, it will be even more important for the people living there that Gibraltar remain part of the UK.

  8. Brexit is not about to turn out the lights … the financial institutions will experience a controlled ‘dip’ for a few months and, then, return with their well-deposited cash to play their usual power game.

    My curiosity is focussed on the apparent absence of any comment regarding the ‘reason’ for Brexit from the point of view of the common British man and woman. Let me highlight that reason; Immigration … not the economy.

    • The “common” Brit knows as much about immigration as he/she knows about molecular biology. Much like the “common” American (Trump supporters) and the “common” Canadian (Harper supporters).

      Inmates running the asylum …

      • Thank God you are here Tangler, to endow us with your formidable intellect! I totally get your position of looking down on anyone that disagrees with you. After all, you strike me as an individual that has read at least one whole article on this topic, so your expertise on Brexit is beyond reproach.

        • I don’t look down on people who disagree with me. I look down on people who are painfully stupid. And, like The Donald, I do not believe in Political Correctness. If you demonstrate that you are stupid, then I will call you stupid. It’s not an insult, merely an observation.

          Have a nice day, son.

          • You’ll feel better in a few weeks. If not, see a doctor.

          • You must look down on a lot of painfully stupid people, who voted for Wynne Bag in Ontario, and Trudope . You are one who is painfully out of touch. Don’t be surprised when Trump is elected President. People are fed up with politicians who are not listening to the people. The Democrats and the Republications are both guilty of this…..result Trump for President, because is is listening. That is what happens in a democracy…something the leftist apparently don’t understand.

        • No kidding. He comes across about as articulate as a monkey throwing poop, yet demands credentials from everyone else to prove they aren’t just a filthy commoner unworthy of an opinion. Is it any wonder the remain side lost with supporters like that?

          We shouldn’t be too hard on him though. This is how progressive globalists lick their wounds after humiliating defeat – by telling themselves that the other side just wasn’t smart enough or educated enough to see things their way. I don’t take it personally. They’re certainly entitled to a bereavement period and I don’t begrudge them for it.

      • Spoken like a true idiotic and naïve Liberal. Trudeau can’t carry Harper’s bags. Soon Canada will look like what the Liberal total disregard for fiscal management has done to Ontario and the man child’s public support will plummet just as Wynne’s has.

        • I’ll agree we are long past due for a change in government in Ontario. But that was also true federally last election. A good many of us voted Liberal not because we were so enamoured with Trudeau but because it was so clearly time for Harper to go.

          Those of us who felt that way may come to regret choosing Trudeau over Mulcair, but regret giving Harper the boot? Not likely.

          In the meantime, Conservatives need to focus on giving us leadership – and policies – worth voting for. Wynne would have been gone last time if we’d been offered better than Hudak.

  9. “It’s entirely possible the people of Britain have just become the first in history to vote for a recession.”

    What a load of stinking cow dung! Canadians just voted for Justin Trudeau – deficit spending and a shrinking economy. So – basically – they voted for a recession. Many other countries have made equally bad decisions in choosing a government or signing bad trade deals.

    The UK voted to take back control of their destiny. After the dust settles, they will be able to hold their own elected government accountable for its decisions. They had no power to fight the EU bureaucrats that voted with the intention of pleasing all 28 EU states (or more realistically Germany).

    They were very smart to keep the British Pound. It may dip as the shock and dust settles – but they will control their own currency and not be bound to economic dead weight like Greece, Spain, Portugal.

    Liberal progressive, socialists, globalists are weeping as this is a blow to their core ideology. Common sense tells you that it is the right move for the people of the UK.

    • What a pile of mouldy buffalo pies!

      Always nice to engage an intelligent person in reasoned debate.

  10. Oh No. Many Brits will be looking to immigrate to Canada and push up
    real estate prices in Vancouver and Toronto even more.

  11. Since when are the lefties so worried about the economy and financial markets and so disdainful of the complaints of the working class and the common people. As an even-handed sort of bloke who just thinks that everyone, rich and poor, great and small, smart and dumb, strong and weak, deserves a square deal and an honest break, I hate the EU and free trade and the globalist NWO because it seems obvious that it screws over the common people and the working class and enriches those who already have the social and commercial and financial advantage. I don’t necessarily want to destroy the rich, but, I will if that’s what it takes to stop them and their EU goons from grinding the poor into the dirt. And I’m sorely disappointed in the phony balony plastic banana left wingers who have been exposed as liars and sellouts for the insiders and against the working class and the regular folks and the middle class and just about everybody who is not a connected Insider.

  12. I always quite like when pundits, intellectuals and polls are proven wrong. Democracy at work knows no boundaries and when the people see what is happening to their country and finally have a voice, they let it be heard. Seriously globalization has gutted the middle classes in Canada and the US. Good manufacturing jobs that often were unionized and paid good wages have been shipped overseas. I haven’t noticed the prices of cars and appliances plummeting with the much lower wages being paid out. Let’s face it, wages have stagnated and people are not happy. I do find it amusing when academics are surprised when the people speak and then have to analyze why they feel that way!

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