Download BREXIT – “CHANGE” ALSO MEANS NEW OPPORTUNITIES

MEDIA UPDATES
BREXIT – “CHANGE” ALSO
MEANS NEW OPPORTUNITIES
Peter Lundgreen, CEO Lundgreen’s Capital
“After the Brexit vote new opportunities
will be tested and maybe also closer ties
between China and United Kingdom”.
What an earthquake the U.K. voters delivered last
Thursday. The good news is that a political earthquake
by definition doesn’t have to have an overall destructive result. It means “change” where the final outcome
will be the sum of how good governments, nations, leaders etc. are to deal with “change”. The challenges for
the whole Europe surely are numerous after the Brexit
but “change” also means new opportunities.
United Kingdom (U.K.) will now feel the economic
challenges more intense and there are in fact several
challenges. The country’s current account deficit is significant larger compared to its peers as graphic one
shows. This is not caused by the Brexit vote but as U.K.
is going independent international investors will judge
the British economy more critical. The needed response
could easily be more public spending cuts to increase
the fiscal discipline. It makes a downwards pressure on
the GDP growth next year. The British pound has lost in
value during the past 6 to 12 months so I assume the inflation moves upwards. Maybe enough to give a slight
pressure on household consumption but limited if any
at all. Further it’s to expect that a part of the jobs in the
financial sector in London will move outside the U.K.
adding to a price drop in the London housing market.
It sounds serious but the British economy was already
gearing down before the Brexit vote. In particular the
real estate market in London is completely overheated
and would need to correct down at some time. But there is no doubt that the Brexit speeds up the trends and
might even deepen the negative developments. The
job losses in London City are solely and directly, linked
to the Brexit decision. It will be very interesting to see
how many jobs are moved to the EU as most jobs are
well paid. The number of jobs I have seen moving so
far actually surprises on the low side though it can’t be
avoided that some sectors suffer when the general conditions suddenly changes.
But “change” means that other sectors will benefit where the British export sector will benefit from the dropping pound. Further I doubt that the broad number of
households in the U.K. will feel a big difference in the
MEDIA UPDATES
CURRENT ACCOUNT AS PCT. OF GDP
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
United Kingdom
USA
China
Japan
EU
Source: FRED, St. Louis, USA
disposal income. The reason is simply that many households haven’t experienced any significant income
growth since the financial crisis. Many of these households didn’t participate in the rising stock and housing
market. All in all I argue that these households will continue consuming as usual. I regard it as a very stabilising factor for the economy and argue that the overall
outlook for the U. K. economy is more balanced than
negative during the coming 12 to 18 months.
In addition I expect U.K.’s government to be a lot more
flexible in organising free trade agreements with other
countries around the world. I expect U.K. to move closer
to China and it might surprise some that the U.K. has
built its own very close ties to many Chinese government levels during the past years without involving
other EU colleagues.
Before the Brexit ballot U.S. President Obama told the
British people that EU would be the only partner for the
coming Transatlantic Trade and Investment Partnership
(TTIP), the free trade agreement between U.S. and EU.
Top politicians adjust to the reality pretty fast and what
happens if the U.K. offers to be more accommodating
towards the American demands and much faster in the
decision process than EU? The British economy is naturally significant smaller than the remaining size of the
EU economy but U.K. is big enough to be interesting
even for U.S. and China.
There are loads of examples of how the “change” will
open new opportunities and paths to follow. But the
big endgame is of course how the future agreement
with EU will be. Both parties can position themselves
as losers or they can both win by getting the best out
of the new realities. As mentioned earlier it all depends
on how good the political leadership is to deal with “change”.
Currently the national political discussions within the
EU membership states points in all directions. In U.K. a
large minority wants to stay in EU and in other EU states
minorities want a referendum about leaving or staying
within EU. My judgement is that the decisions remain as
they are and the new EU without U.K. remains as it is –
at least for some time to come. If EU and U.K. acts wisely
they agree on a free trade agreement and let U.K. have
an agreement with EU that at least is at the same level
like with Norway and Switzerland. The reality is that neither EU nor U.K. can allow themselves to risk a lower
GDP growth due to trade barriers between EU and U.K.
But over time one part will end up with a stronger position. Right now the EU leadership is much more chocked than they express but they say that EU needs to
change. Just a few days after the Brexit ballot especially
France and Italy have announced how to move EU forward – more public spending and investments….. This
solution origin from countries that already are overloaded with public debt and are worse off than U.K.
If U.K. follows the expected tough track with tight fiscal
discipline it will over time lead to a much stronger British economy compared to EU, or in particular the Eurozone. Finally it’s where capital flows will move towards
– back to U.K.
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Media Contact: Melissa Vergara
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