Will there be a ‘Brexit-Bounce’ for the UK economy?

08 Jun 2020

UK EU flags Is the Bank of England’s gloomy prognosis for a sluggish future for the UK economy post-Brexit correct? Or is there in actuality, a positive outcome peeping over the horizon? Have people forgotten the fact that the UK hasn’t really had a government that could govern in the last three years; conceivably the last five?

The UK now has a government that can actually govern, that has an agenda, that has a plan, that’s going to spend money, that’s already said by how much it is going to raise the minimum wage in each of the next five years. The impact of not having had a government, the concern about Brexit and the concern about a Corbyn government, has clearly impacted business confidence and sentiment – giving rise to many forecasters’ perceptions for the short term. Releasing all that should ensure that actually… growth will positively surprise. 

Now the push-back however is, what about the trade negotiations? First, we should ignore what the papers say – they are just throwing rocks at each other and talking to their own domestic agendas. Behind closed doors, neither side wants a difficult, cliff edge exit. Equally they can’t do it all in 11 months either, so they’ll likely do a ‘traded goods’ deal. Then, over the coming years (it will take that long) to gradually, sector by sector and industry by industry – work out how to de-harmonise and so on. 

Even if there are some companies that hold back this year, come 2021 and a recognition that even with covid-19, the world hasn’t stopped, and growth will accelerate. Many economists lean heavily toward disagreeing with the 2021 recession while other predictions say otherwise – believing it is going to be an extraordinarily positive environment for the future of the UK economy. 

It used to be said, certainly in developed markets anyway, that ‘the stock market is not the economy.’ But one of the things that has happened over the last couple of years and is down to the sentiment that politics and economics creates – is that the stock market has indeed suffered. Would this then translate to, if you’re cheerful and optimistic about economics you’re also cheerful about stock market opportunities? Tracking Wall Street since 2016 then the referendum – the UK has clearly lagged Wall Street, while global investors completely shunned the UK, as have many domestic investors. Now however, sterling is cheap. So, whilst of course, a lot of domestic sensitive companies will have a much better backdrop, the international investor will be drawn to some of those big multi-nationals too because the currency is so cheap. 

For example, a stock like Whitbread which owns Premier Inn, clearly had a very difficult 2019 and was really affected by Brexit because of regional travel Mon-Thurs, and of course, it is business sensitive. It is this type of company who could now benefit from a ‘Brexit-bounce’ over the next two or three years. In December, Whitbread noted that because they employ a lot of people on minimum wage and fully accepted that budgeting for pay that is going to go up 5% per annum (forever) – they simply offset that amount through their productivity gains. 

And if that example is indicative of the sort of wage growth that people are going to be getting – it could be seen as a pretty supportive argument for activity in a post-Brexit UK economy.