Mark Carney warned U.K. voters it could happen. Now economists say it’s time to get ready.
Almost three quarters of respondents to a Bloomberg survey conducted after Britain voted to leave the European Union say the economy will slip into a recession for the first time since 2009. A majority also predict that the Bank of England governor and fellow policy makers will add more stimulus, including cutting interest rates in the third quarter.
The gloomy forecasts follow the shock June 23 referendum, which leaves Britain in limbo about its relationship with the EU, its biggest trading partner. As European leaders threaten to play hardball in any negotiations on the country’s withdrawal from the bloc, a political vacuum at the top of U.K. government is compounding the negative sentiment.
Carney warned in May that a vote for Brexit could tip the country into a technical recession — defined as two consecutive quarters of contraction — having earlier said it posed the biggest domestic risk to U.K. financial stability. Even so, Britons backed “Leave” by 52 percent to 48 percent.
“The U.K. is in a mess,” said Alan McQuaid, chief economist at Merrion Capital in Dublin. “It will most likely be left to the central bank to clean up the politicians’ mess, with Mark Carney and his colleagues probably implementing further monetary stimulus before the year is out.”
In research published in the wake of the referendum, Goldman Sachs Group Inc. and Bank of America Merrill Lynch were among those forecasting an economic contraction. Both said the impact of the vote could subtract about a cumulative 2.5 percent from GDP.
With the vote prompting Prime Minister David Cameron to resign and leading to turmoil in the opposition Labour Party that saw leader Jeremy Corbyn lose a confidence vote, investors and households seeking reassurance may increasingly look to Carney.
Within hours of the referendum result, the governor addressed the nation and said the bank was ready to act to support the financial system and the economy if needed. In the Bloomberg survey, in addition to rate cuts, a majority expect the BOE to restart asset purchases, while almost half forecast measures to aid credit.
Having initially slumped after the vote, the pound and stocks rose for a second day on Wednesday. The FTSE-100 Index advanced 2.1 percent as of 12:21 p.m. London time, and sterling gained 0.7 percent.
According to the Bloomberg survey, 71 percent of 35 respondents said the decision to exit the EU will lead to recession. Of the 25 economists who forecast a time period, there was an almost even split between those expecting it this year and those who predict 2017. Just one said it will come later.
Investors also predict policy makers will opt to support growth, with traders pricing in a 34 percent chance of an interest-rate cut at the Monetary Policy Committee’s July meeting, and a 54 percent probability of a loosening in August.
The expansion was already cooling before the vote, slipping to 0.4 percent in the first quarter from 0.6 percent. That may have continued this quarter as uncertainty amid the referendum campaign damped hiring and investment. While reports Wednesday showed U.K. mortgage approvals rose in May and house prices continued their steady advance in the weeks leading up to the vote, the decision to leave may undermine future demand.
According to James McCann, European economist at Standard Life, looser BOE monetary policy “can’t be far off.” He sees a rate cut at the July 14 meeting and asset buying potentially a month later, though that will partly depend on an orderly sterling depreciation.
“The shock to the economy justifies easier policy and the BOE is unlikely to be deterred by a short-term pickup in inflation as sterling depreciates,” he said. “It looked through a similar inflationary bump after the financial crisis.”
The European Central Bank is in no rush to ease its monetary policy in response Britain’s vote to leave the European Union, taking comfort in a calmer-than-feared market reaction, several sources have told Reuters.
The Brexit vote has hit the shares of euro zone banks and is likely to act as a drag on the euro zone economy, as ECB President Mario Draghi told EU leaders on Tuesday. It is also raising fundamental questions about the future of the EU.
But conversations with around a dozen officials familiar with the ECB’s thinking showed that the bank found some reassurance in the market rebound this week and was happy to take a wait-and-see stance, given the lack of hard evidence about the actual impact of Brexit.
Emergency swap lines designed to provide euros to UK banks in case of stress had not been activated and, contrary to what had happened during the 2008 crash, financial markets had functioned smoothly despite heavy losses in the pound and some shares, the sources, who asked not to be named, said.
They stressed the ECB’s willingness to provide more stimulus if the inflation outlook worsens but cautioned the UK vote was raising political questions that were for EU governments and institutions, rather than the central bank, to answer.
“This is a political problem not a monetary phenomenon,” one of the sources said. “We could act, we have the tools, but that would not solve the broader problem and for now, every estimate about the actual impact of Brexit is nothing but guesswork.”
The officials added it was too early to assess the impact of the referendum on investor and consumer confidence – the most immediate transmission channel – and the bank would be in a better position to make a call on that when it gets updated staff forecasts in September.
If markets continued in the same, calm vein in the run up to the ECB’s July 21 policy meeting, the most to expect could be verbal reassurance that the bank stands ready to do more if needed, conversations with the sources showed.
For now, the officials expressed relief at the sanguine reaction of investors in sovereign debt. Southern Europe’s borrowing costs fell sharply for a third straight day and French bond yields hit record lows on Wednesday.
The calm on the sovereign bond market marked a sharp contrast to the 2010-12 debt crisis, when a ‘doom loop’ between indebted governments and their main creditors, banks, threatened the euro’s very existence, the sources noted.
“Markets priced in a lower growth path, both for the euro zone and the UK,” one source said. “It seems quite realistic now and I don’t see significant overreaction.”
Still, this line of thinking may put the ECB on a collision course with markets, which have rebounded at least partly in the hope that the ECB and the Bank of England would step in with more stimulus.
Investors now fully price in a rate cut in Britain and the euro zone by the end of this year.
The ECB cut rates twice since December and is already buying 80 billion euros ($88.71 billion) worth of assets, mainly euro zone government bonds, every month in a bid to boost inflation.
These purchases helped soothe market nerves when a Greek referendum on the terms of its bailout agreement with creditors almost pushed the country out of the euro zone last summer and the reaction to the UK vote was seemingly following the same path.
The sources said that any further move by the ECB to support markets, while possible in theory, would merely act as stop-gap and do nothing to address fundamental citizen and investor concern about Europe’s political cohesion and economic strategy.
In fact, a new interest rate cut could even exacerbate problems at euro zone banks, which have complained that low lending rates and a charge on the money they park at the ECB were squeezing their margins, some of the sources said.
There was agreement among the officials who spoke to Reuters that the broad selloff in banking shares cast the sector as the weakest link in the European economy, with its meager profits and, in countries such as Italy, heavy burden of bad loans making it vulnerable to any economic downturn.
The ECB’s top supervisor, Daniele Nouy, spelled out some of the steps the ECB would like European and national law-makers to take in a letter to a group of members of the European parliament published on Tuesday.
“Among other reforms, they should consider streamlining legal processes related to debt recovery, removing impediments to the enforcement of loan collateral, introducing out-of-court debt work-out solutions, and fostering the development of distressed debt markets,” Nouy wrote.
Source: Reuters (By Francesco Canepa and Balazs Koranyi, Editing by Jeremy Gaunt)
Mario Draghi took an unusual tack among the world’s major policy makers — giving a speech that had no explicit reference to the U.K.’s decision to quit the European Union.
While investors are keen to hear what the European Central Bank president is doing to contain the fallout from Brexit, he decided to use his opening address at the ECB Forum in Sintra, Portugal, to call for global policy alignment. Acknowledging that ultra-loose monetary policies have “inevitably” created potentially destabilizing spillover effects, he said there is a “common responsibility” to address the world’s economic weaknesses.
“We can benefit from alignment of policies,” Draghi said on Tuesday. “What I mean by alignment is a shared diagnosis of the root causes of the challenges that affect us all; and a shared commitment to found our domestic policies on that diagnosis.”
Central banks’ extraordinary measures to boost inflation since the global financial crisis have depressed interest rates, stoking discontent among savers and drawing accusations that they have boosted support for populist parties.
The latest and most disruptive sign of popular discontent was the U.K. referendum, which saw voters opt to leave the EU. The pound crashed to a three-decade low, global financial markets have been thrown into tumult, and bets that the Bank of England and ECB will cut interest rates have increased.
Draghi said in welcoming remarks at a dinner on Monday that the best word to describe his sentiment in reaction to the British referendum was probably “sadness,” and chose to say no more the next day. He will now travel to Brussels for a meeting with EU leaders later on Tuesday.
The ECB has previously pledged to provide liquidity to banks, if needed, to ensure financial stability after Brexit.
Draghi’s message in Sintra can be seen as a follow-on from speeches in Vienna on June 2, when he insisted the central bank will do what it must to meet its inflation mandate as quickly as possible, and in Brussels a week later when he urged that national government policies must be aligned with monetary policy.
“What I am saying here is that the same applies at the global level,” he said at the forum. “With internationally mobile capital, the clearing interest rate that balances saving and investment is more a global concept than a local one.”
The ECB Forum, a European equivalent of the U.S. Federal Reserve’s Jackson Hole symposium, runs through Wednesday. Executive Board members Benoit Coeure and Peter Praet are chairing panel discussions on Tuesday, with Sabine Lautenschlaeger and Vitor Constancio scheduled for the following day.
A debate with BOE Governor Mark Carney and U.S. Federal Reserve Chair Janet Yellen that was planned at the end of the event was canceled so Draghi could go to the EU meeting in Brussels, the ECB said in a statement Monday.
The ECB Forum’s title is “The future of the international monetary and financial architecture,” and speakers are showing that while Brexit may be on their minds, they intend to address that bigger picture.
University of California economics professor Barry Eichengreen presented a paper on global monetary order before the discussion moved on to topics including real interest rates, imbalances and the curse of regional safe asset providers at the zero lower bound.
“The upshot is that, in a globalized world, the global policy mix matters — and will likely matter more as our economies become more integrated,” Draghi said. “This is not a preference or a choice. It is simply the new reality we face.”
The leaders of France, Germany and Italy pledged to set new policy priorities for the European Union by September and implement projects to increase economic growth and security in a bid to prop up flagging popular support for the bloc after the U.K. voted to leave.
The EU leaders also said the bloc’s 27 other member states wouldn’t hold negotiations about the outlines of the U.K.’s future relation with the EU until London formally notified the bloc of its intention to leave.
“Until this has happened, no further steps can be taken,” German Chancellor Angela Merkel told a joint press conference in Berlin with Italian Premier Matteo Renzi and French President Franç ois Hollande ahead of a dinner at the chancellery.
The insistence that negotiations about a new partnership can’t begin until Britain invokes Article 50 of the EU Treaties, which kicks off a two-year departure process, is meant to discourage euroskeptic insurgencies in countries ranging from France to the Netherlands and Austria, EU officials and politicians have said.
Mr. Hollande said the British vote meant Europe now needed a renewed sense of unity and purpose and pledged to deliver a package of economic and security measures by September.
“We have to accept the [British] decision but at the same time work on defining what Europe’s new focus should be,” he said. “What happened is very sad but the decision is also a good moment for Europe to start a new page.”
Agreeing on these measures could take time. France and Germany have long clashed over how best to boost growth, create jobs, and tackle immigration and terror. Wolfgang Schä uble, Germany’s powerful finance minister, has already rejected a blueprint for further fiscal integration of the eurozone, unveiled by the French and German foreign ministers this week, as out of touch with the current political reality in the bloc.
The leaders of the EU’s 28 member states?including the U.K.?meet in Brussels on Tuesday for a first exchange about the British referendum and its consequences. London will be excluded from a second round of talks on Wednesday.
Speaking earlier on Friday, Ms. Merkel said she understood Britain needed time to react to last week’s vote but couldn’t leave Europe in limbo for too long. “We mustn’t allow for a drawn-out period of uncertainty,” she said.
The comments reflected the European line that has been crystallizing since Britons voted Thursday to take their country out of the bloc?that while Britain shouldn’t be rushed, uncertainty about its plans couldn’t persist much beyond when a new U.K. leader is expected to be in place. Outgoing Prime Minister David Cameron’s Conservative Party intends to choose a new prime minister by Sept. 2, an official from the Conservative Party said Monday.
Ms. Merkel said it was important to keep the remaining members of the bloc solidly together.
“We must do everything in our power to prevent a strengthening of centrifugal forces,” she said, referring to other countries that might seek to follow the U.K.’s lead.
Speaking in Rome before flying to Berlin, Mr. Renzi said Europe needed to react quickly to the U.K.’s decision and use it as a chance to relaunch the bloc. The Italian premier also called for European partners to focus more on social issues than on bureaucratic ones.
“If we stop being on the defensive, what has happened in the U.K. can become a great opportunity to relaunch Europe,” he added.
Over the weekend, Ms. Merkel rebuked calls from other European politicians to push Britain into immediately invoking article 50 of the EU treaty, which governs how a member state can exit the bloc. And on Saturday, she said she wouldn’t pursue a punitive line in exit talks.
“There is no reason to be particularly nasty during these negotiations. They should be conducted in a rational way,” she said.
Peter Altmaier, Ms. Merkel’s chief of staff, suggested at the weekend that the referendum may not be the last word on Britain’s EU membership.
“Politicians in London should have the possibility to think again about the fallout from an exit,” he told a consortium of German regional newspapers.
In Ireland, Irish Prime Minister Enda Kenny agreed with the EU consensus, saying negotiations should wait until the election of a new prime minister and that the U.K. shouldn’t be punished.
Speaking to lawmakers who were recalled for a special sitting of parliament following the U.K.’s vote Thursday to leave the EU, Mr. Kenny said the “stakes were higher” for Ireland in the coming negotiations because of its close ties with Britain and its shared interest in maintaining peace in Northern Ireland, which is part of the U.K.
“I think that in other governments there is a full understanding that there has been a political earthquake in the U.K., the consequences of which will take some time to work out,” he said.
Paul Hannon and Jenny Gross in London and Giada Zampano in Rome contributed to this article.
Corrections & Amplifications: Prime Minister Enda Kenny said the U.K. shouldn’t be punished for its decision to leave the bloc. An earlier version of this article incorrectly stated he said it should be punished.
“We had to start everything from the beginning in this place,” said Krzysztof Iwaniuk, the mayor of Terespol Municipality (Gmina Terespol) in the far east of Poland.
I looked out from his office windows at green fields which rolled off into the distance. There was nothing out there but grass and trees and a hill, but this is set to change very soon. A new city will be built here.
Situated on the border of Poland and Belarus, Terespol Municipality sits on the crux of the EU of Europe and the CIS of Central Asia and Russia. This prime geopolitical position has led to the place becoming a key junction on the Silk Road Economic Belt, an international initiative to build up and link together land and sea ports, special economic zones, industrial corridors, and cities from the coast of China to Rotterdam.
The new city will be built in Kobylany, a small village within Terespol Municipality, and is slated to eventually provide housing for 30,000 people — or roughly four times the municipality’s current population. 60 hectares have been procured by the local government for this new development, with two or three thousand more hectares located nearby on state land that could potentially be tapped later on if needed.
While China has constructed hundreds of new cities over the past twenty years and is currently creating even more to support the Silk Road Economic Belt and its corresponding 21st Century Maritime Silk Road, this scale of fresh development simply isn’t common in Europe, a region where cities are generally age-old, almost immutable entities.
It is Terespol Municipality’s position as a transportation hub that’s spearheading this broader development. Nearly all of the regularly operated trans-Eurasia trains between China and Europe stop here to undergo customs clearance, transship cargo, and transfer containers between European and Russian gauge tracks. The E30 expressway, which runs from Berlin to Moscow, also passes right through the municipality, where there is a major road terminal near the Belarus border. Like at Khorgos Gateway on the China/CIS border in Kazakhstan, these logistical events have provided the impetus for a much larger development scheme to better leverage the area’s economic potential.
“It is developing in a natural way along these logistics lines,” Iwaniuk stated.
Krzysztof Iwaniuk himself has been looking east for over twenty years. As the municipality’s first and only post-Soviet mayor, being elected every four years for the past 27 years, he has been working to bolster his constituency’s position as the gateway between Europe and Asia. Hanging from the front of the administrative building where his office is located is a banner saying “culture without borders” and in the lobby there is an up-to-date selection of China Daily newspapers prominently displayed upon a coffee table. On the cover of the municipality’s official map there is a bright red line connecting Terespol to Beijing — a feature that’s been there long before Xi Jinping began talking about One Belt, One Road.
“I remember my first visit here about 20 years ago,” began Krzysztof Szarkowski, an intermodal logistics manager for DHL in nearby Malaszewicze, “and he also informed me, ‘Yes, we are on the main road from China to all the European countries. It is the future, it is the future, it is the future.’ And he was alone at this time. He was totally alone.”
Iwaniuk is not alone anymore. From Western Europe through the Caucasus, Middle East, Central Asia to China, the “New Silk Road” has become a relevant topic for debate and a potentially big opportunity for those with the foresight to jump in.
However, the idea for Kobylany new city started many years ago when Iwaniuk began looking for a new location for the municipality’s administrative headquarters. In an uncommon political move he removed the region’s most populated, namesake town of Terespol from the municipality, as the financial resources needed to continue running this center would eat up most of the available funds that could otherwise go towards creating more promising new developments and better infrastructure for the rest of the municipality.
After a ten year effort, the land for Kobylany new city was purchased, and development was set to begin. Currently, the only building that has been constructed is the municipal government headquarters, which is a completely modern, three story building conspicuously sticking up out of the middle of a completely empty field. But in renders of what the new city is slated to become, the government building is at the center of a quaint town of two story villas with two car garages that are neatly arranged along tree-lined residential streets. The view is something like that of a wealthy English suburb, and nothing like anywhere else in the region it’s being built in.
“It is easier to do something from zero than to improve something old,” the mayor proudly exclaimed.
There are three parts to Terespol municipality’s development strategy. The first is a 40 hectare duty free and bonded zone that is near the dry port at Malaszewicze. It is owned by PKP, Poland’s national railway, and is currently a completely blank canvas awaiting development — ideally, awaiting development by a Chinese company, Iwaniuk pointed out. The second is a free industrial zone that’s across the street from the road transport terminal, which is currently in operation and has a variety of manufacturing and logistical enterprises located in it. The third is the new city at Kobylany.
Iwaniuk explained that Terespol municipality’s biggest problem and one of the main reasons for the new city is population outflow.
“We have control of a territory one-third the size of Warsaw and only have 7,000 citizens,” Iwaniuk explained. “This makes it very difficult to deliver the right infrastructure. Years ago we had more people than today. Today, people in Poland are going to bigger and bigger cities. They would rather go to a big city than build a new city. They don’t come back until they retire.”
Terespol Municipality is distinctly rural, extending over 141 square kilometers and containing over 26 villages — the most populated having 2,000 people, the least populated having just seven. The idea which drove the creation of the new city was to concentrate this decentralized, intermittently populated expanse into an easier to service municipal core which could better leverage the area’s economic, infrastructure, and human resources.
A common criticism of Terespol Municipality’s Silk Road ambitions is that the place simply doesn’t have a large enough population to support the ensemble of logistics centers, warehouses, and factories that could otherwise be built there. The municipality is in the unusual position of having more jobs than people.
“Our problem is that we have relatively a lot of places to work, around 3,000 places,” Iwaniuk explained. “But people are living in other places. Our idea was to create a way for people who are working here to also live here. We wanted to create the conditions for them to stay.”
There is evidently a real demand for this, as all of the available land plots in the new city have already been sold as the new city edges closer towards coming to life.
“Everything has been done that he has planned 20 or more years ago,” Szarkowski said of the mayor. “Everything.”
The future prosperity of Kobylany is directly tied to Poland’s international relations with the countries of the CIS as well as China beyond, with an emphasis on the 300,000 person Belarussian city of Brest — which is so close to Terespol Municipality that when the wind is blowing in from the east you can smell its factories. The existing border agreement with Belarus was signed over 60 years ago with the Soviet Union, and presents some archaic and extremely restrictive person-to-person and trade policies that are representative of another time.
“It is an abnormal situation,” Iwaniuk explained. “The situation today is different, the infrastructure is different, but from a legal point of view we are still in the Soviet Union period.”
However, there are initiatives that are in process to modernize and simplify border crossing procedures here, the effect of which could be a boon for Kobylany new city and its emerging industrial and logistics zones. Brest is the largest city anywhere near Terespol Municipality, and just a hundred kilometers away is Grodno, which has the largest population of Polish people on the Belarus side of the border.
“[The new city] can be sped up if relations with neighbors can be improved,” Iwaniuk said. “Belarussian people are probably ready to invest, to have their own plots also. Even Chinese people. This policy with our neighbors is not helping us. It’s not helping trade exchange or people exchange.”
Development throughout Terespol Municipality has been gaining momentum. As China-Europe rail grows in popularity so too does interest in this key transportation hub on the EU/CIS border. Iwaniuk claimed that over the past few years his municipality has seen roughly a billion Polish zloty (around US$250 million) invested by various companies.
“That is not bad for seven thousand citizens,” he wryly added with a smile.
As far as Chinese interests go, there has been a regular procession of government delegations from an array of provinces parading through, asking questions and taking photos.
“Each big company here has partners in China from different provinces. Now that we’ve had visits from the big bosses we’ll see what influence we have,” Iwaniuk said.
As the New Silk Road transitions from a concept and a dream to brick and mortar facilities, international trade pacts, and billions of dollars of commerce, well-positioned places like Terespol Municipality stand to develop into some of the most relevant business hubs of tomorrow.
“Our map for years have showed the most important road to China and now it’s starting to be realized,” Iwaniuk said as he glanced out the window at the rolling fields of potential. “We only need the right partner for this.”
Risk of the world falling into a recession and financial crisis is limited in the aftermath of UK’s decision to leave the European Union, concluded Nouriel Roubini, Professor of Economics and International Business at the Leonard N. Stern School of Business, New York University, in a panel discussion on the global economic outlook at the Annual Meeting of the New Champions 2016.
However, he said he does not expect the world to be out of the woods anytime soon from the stagnation experienced across both advanced and emerging economies. Mediocre growth is the new normal, he quipped. Traditional monetary and fiscal policies have lost their efficacy to jumpstart anaemic economies, and structural reforms have been constrained by politics, Roubini added.
Commenting on Brexit, Roubini warned of a global trend of backlash against globalization spurred by the fruits of growth not trickling down to all segments of society. ‘What we saw in the UK referendum was a division between rich and less rich, young and old, skilled and less skilled. This kind of pressure is becoming severe,’ he said. ‘Look at the United States: you have Donald Trump representing the angry white blue-collar worker, and Bernie Sanders for both angry white- and blue-collar workers.’
Radical parties are emerging not only in peripheral EU countries, but in core nations as well, Roubini observed. Unless there is inclusive growth, political backlash will intensify, he predicted. Roubini’s view was shared by Mehmet Simsek, Deputy Prime Minister of Turkey. ‘Brexit represents one of the most significant pullbacks from post-World War Two consensus on openness in trade, labour movements and globalization in general,’ he said.
Turning to how the US is likely to respond in relation to its much-anticipated move on interest rates in the second half of the year, Roubini was of the view that the US Federal Reserve is likely to keep rates on hold. Given the current environment where political uncertainties abound and markets remain volatile, those conditions imply a strengthening of the US dollar. Raising the rates would cause even greater appreciation, which is unfavourable for American exports, he explained. Other panellists agreed, noting that not hiking rates will provide breathing space for emerging markets and stem a capital flight to the US from rate increase.
The panel shifted gear to discuss the high debt levels in China, currently at some 160% of the GDP, and whether the leverage level portends a banking crisis. A collapse in the country’s financial system would have massive reverberations as its economy, the second largest in the world, contributes some 35% to global GDP. Most of the panel agreed that the doomsday scenario is unlikely as the bulk of the bad debt exposure is limited to state-owned companies and not households and private-sector firms. They believe the healthy balance sheet of the central government can shoulder any shock to the system.
‘We don’t expect a crisis because the source of funding in the system, which is mainly deposits, is secure,’ said Jing Ulrich, Managing Director and Vice-Chairman, Asia-Pacific, JPMorgan Chase & Co., Hong Kong SAR. She added: ‘You have $23 trillion equivalent of RMB savings in the banking system, the biggest in the world. And these are secure and will not leave the system because of China’s capital account control. Also, the capital adequacy ratio in Chinese financial institutions remains high by international standards.’ That said, Jing and the other panellists underlined that structural reforms, especially in state-owned enterprises, are urgently needed so that these firms do not drag their feet on restructuring, thinking the state would bail them out.
Jing recommended further liberalization of the capital markets by opening up more corporate funding sources through equity and bond issues, and allowing international investor participation. She said this change would force Chinese companies to be more accountable in the way they are run. ‘Traditionally, the Chinese economy has been relying too much on bank lending. There is more transparency when you raise money from equity and bond markets. International investors’ participation will inject a sense of discipline and governance,’ she said.
The stunning outcome of last week’s U.K. referendum has unleashed waves of doubt about what happens next. Here’s a list of the latest questions doing the rounds:
Can the result somehow be overturned?
This comes up again and again. In short, it’s possible, but unlikely. The referendum is non-binding, so the next prime minister could just choose to ignore it. If there’s a snap election, a political party could promise to call a new referendum. Scotland could also make things difficult.
Still, it would be extremely difficult to ignore the views of the 17.4 million people who voted to leave. We delve into this issue in more detail here and here.
Could the U.K. parliament veto the referendum?
In theory, yes. Human rights lawyer Geoffrey Robertson argues in this article that parliamentary assent is needed to repeal the 1972 legislation that took the U.K. into the EU. So lawmakers could override the public will by refusing to remove that law from the statute books.
Others aren’t so sure. Raoul Ruparel of the Open Europe think tank says that the legislative body can certainly apply political pressure on the government. But once Article 50 of the Lisbon Treaty is triggered, Britain would have to leave the EU after two years, regardless of what parliament does.
And the question remains as to whether lawmakers would risk angering voters by blocking the referendum. Especially as it was backed by supporters of both major political parties.
What have we learned about the government’s Brexit plans?
We got a few bits and pieces in the past 24 hours. A new EU unit will be set up in government to start doing the groundwork. It will comprise of officials from the Treasury, the Cabinet Office, the Business Department and the Foreign Office. Conservative lawmaker Oliver Letwin, who heads the Cabinet Office, will ensure all points of view across the political spectrum are fed into the process.
Boris Johnson, the favorite to succeed Cameron as prime minister, wrote in an op-edthat there will continue to be access to Europe’s single market and EU citizens living in the U.K. He disclosed almost no specifics.
Ultimately we are no closer to knowing what the U.K.’s relationship with the world’s biggest trading bloc will look like when the secession is completed.
When will we have a new prime minister?
With stocks plunging and the pound hitting new lows, the Conservative Party’s grandees today said a new leader will be elected by Sept. 2. That’s nearly a month earlier than originally planned by Cameron.
Just how bad could the U.K. recession be?
Anecdotal evidence suggests that the result is already spreading a chill through the economy. Property transactions are being canceled, Easyjet Plc lost nearly a quarter of its value Monday after saying the result will hurt business for the rest of the summer and Airbus Group SE said it’s reviewing its investment strategy in Britain. Nomura Holdings Inc. estimates that the economy could contract almost 2 percent from peak to trough. That compares with a 6 percent slump during the financial crisis of 2008-2009.
Why does the Labour Party crisis matter if it’s not in power?
With the country mired in its biggest political crisis in decades, the opposition matters because it will push the government on its weak spots and can force concessions on issues such as immigration and market access. Should Cameron’s successor call an election in coming months, Labour will need to clarify its position on Brexit as its leader could be forming the next government.
What is the ‘Shadow Cabinet’ anyway?
Essentially, it’s the Labour Party’s government-in-waiting. Until Sunday, it consisted of 31 people, each with the task of holding a particular government minister to account. With criticism of Corbyn’s leadership style mounting an unprecedented revolt is underway. Since Sunday, 18 members have quit and at least 40 lawmakers have left his wider team.
So will Corbyn quit?
Probably not. He was elected just nine months ago by almost 60 percent of the party membership. He is still popular with them and hence difficult to dislodge. The problem for Labour’s plotters is that the base was swollen by an influx of new left-wing members when membership rules were changed last year. Corbyn, who tweeted on June 23 that he voted “Remain,” has said he intends to stand if a leadership vote is triggered.
Central banks’ efforts to revive economic growth and inflation suffered another blow with Britain’s vote to leave the European Union. The vote has unleashed anxiety and uncertainty that will dampen investment, hiring, wages and prices.
In the long run, though, Brexit could prove inflationary. That’s because it may mark a turn against globalization, which in the last few decades has helped hold down prices and wages via lower tariffs, more efficient supply chains, outsourcing and immigration.
The initial response of markets was to assume inflation will fall. The pricing of regular and inflation-indexed bonds suggest expected inflation over the next 10 years has fallen 15 basis points in the U.S., 10 in Japan and 13 in Germany since Thursday’s vote for Brexit. (There are 100 basis points in a percentage point.)
This reflects two factors: lower oil prices will directly hold down inflation in the next few years. Over subsequent years, investors are less confident central banks will get inflation higher. “The Fed’s dovish shift on June 15 helped put a floor under inflation expectations but this has been completely erased since Brexit,” notes J.P. Morgan.
In the United Kingdom, though, expected inflation has risen. In part, that reflects the coming effect of the pound’s devaluation on import prices. That won’t bother the Bank of England for now. In 2008, an even bigger drop in sterling helped send inflation over its 2% target in subsequent years. The bank ignored it, correctly betting that weak demand would ensure that the rise was not sustained. The same logic applies today: it will worry more about the hit to demand than the impact of the currency on inflation, and could cut rates or at least raise them more slowly.
But later on, the picture gets more complicated. Inflation occurs when the demand for goods and services grows faster than the supply. Brexit has hit demand, but could also chip away at supply. If import tariffs rise, that will raise domestic costs. If barriers to exports go up, that will reduce the productivity of British firms. Lower immigration could require firms to raise wages, but also reduce local employers’ productivity as they struggle to fill some positions.
In a May report, the BOE touched on these more complicated dynamics: ” Higher import prices would depress investment somewhat, as a significant proportion of UK capital spending uses imported capital goods. Over time, this would reduce potential output. …This combination of influences on demand, supply and the exchange rate could lead to a materially lower path for growth and a notably higher path for inflation” than if Britain stayed in the EU.
Brexit marks a repudiation of globalization — the movement of goods, services, capital and people across borders. Similar backlashes are underway on continental Europe and in the United States, so the entire world, not just Britain, may suffer supply-side damage.
Lower tariffs and international supply chains have enabled firms to produce for larger markets, specialize, raise productivity and slash costs. More controversially, outsourcing also gives them access to cheaper labor. While the link between immigration and wages is more ambiguous, increased unskilled immigration probably does, at the margin, reduce what low-skilled workers earn. As globalization stalls or even retreats, wage inequality might narrow, yet higher costs would leave both the working class and the affluent worse off. These cost pressures would emerge at a time when productivity growth worldwide is already stagnant.
In theory, central banks can set interest rates over the long run to ensure that demand does not grow faster than supply and thus inflation stays on target. But central banks take their cues from the public and their elected representatives. Populist politicians are more likely to want easier monetary policies and appoint central bankers who agree.
Some economists would actually applaud. They say inflation should be higher than 2% to ensure that interest rates, eventually, are also higher and less likely to hit zero again. Some have called for “helicopter money,” i.e. having central banks print money to pay for tax cuts or higher government spending.
A combination of rising costs as globalization retreats and looser fiscal and monetary policy would be ultimately push inflation, and interest rates, higher. Peter Berezin, of the Bank Credit Analyst, an investment advisory, writes: “Ironically, while Brexit has led to a plunge in long-term bond yields, the longer-term outcome could be higher yields.”
The pound extended its advance from a three-decade low as traders took advantage of the global market rout to go on a buying spree.
Stocks, oil and higher-yielding euro-zone bonds all recovered some of the losses seen in the wake of Britain’s vote to leave the European Union. That’s even as investors — and European leaders meeting in Brussels — waited to see how the nation will execute its departure from the world’s largest single market.
Brexit is currently in deadlock because the U.K. itself must trigger the exit process following its June 23 referendum. Yet Prime Minister David Cameron announced his resignation on the morning the “Leave” result came in, and has repeatedly said that it’s for his successor — who’s not likely to be selected until September — to begin the proceedings. That’s frustrating his EU colleagues, many of whom want the process to start as soon as possible.
“Markets have calmed down somewhat,” said Thu Lan Nguyen, a foreign-exchange strategist at Commerzbank AG in Frankfurt. “We may see some short-term continuation of the recovery in the pound if there’s an increased chance of a new prime minister who can secure the access of the U.K. to the single market. But uncertainty is still high and market participants are jittery.”
The pound rose 0.6 percent to $1.3418 as of 12:52 p.m. in London, a day after gaining 0.9 percent. Britain’s currency tumbled 8.1 percent on Friday, the biggest decline on record, and on Monday sank further to $1.3121, the lowest since 1985.
It’s still down 9 percent since Britons went to the polls to decide on their future relationship with the rest of Europe.
Sterling gained 0.5 percent to 82.51 pence per euro, after touching a more than two-year low of 83.80 pence on June 27.
Doubts are even emerging that Brexit will happen. The referendum isn’t legally binding on the government. A public petition calling for a rerun of the referendum attracted the support of millions. And pro-Europeans have suggested that members of the “Leave” campaign won with false promises, making the result illegitimate.
Cameron has said the government must honor the result of the vote, while German Chancellor Angela Merkel said in Brussels Tuesday that she sees “no way back” from the Brexit vote.
Still, the suggestion that an exit could be avoided has gained momentum, and Nordea Bank AB said Tuesday it saw a 30 percent chance that the U.K. won’t trigger the mechanism to quit the EU.
“There was definitely an air that full Brexit wasn’t necessarily a done deal yesterday,” London-based Deutsche Bank AG strategist Jim Reid wrote in a note to clients. “But we won’t know that for many, many months and possibly much longer — so expect lots of mood swings ahead.”
India is offering global oilfield service providers starved of new contracts a $27 billion lifeline as the government’s ambition to cut fuel imports drives fresh investment.
Spending plans are ratcheting up and stalled projects restarting after the government in March announced pricing freedom for natural gas from deepsea fields that begin production this year. Coming at a time when the cost of rigs and services has halved, that’s prompted India’s largest explorer Oil and Natural Gas Corp. to launch its biggest development campaign yet. Reliance Industries Ltd. is preparing to restart work at four offshore oil and gas blocks.
The flurry of activity is providing some respite to services companies including Schlumberger Ltd., Technip SA and Halliburton Co. that were stung last year by more than $100 billion in slashed spending by explorers as oil collapsed. Investments in India are growing to meet Prime Minister Narendra Modi’s target of cutting import dependence by 10 percent over six years as increased consumption puts the nation on track to become the world’s third-largest oil consumer.
“In India, there are two to three major identified projects and they are probably bigger than anything else going on in rest of the world,” Technip India’s Managing Director Bhaskar Patel said in an interview. “India is a place where there is work available.”
India’s hydrocarbon resources still remain highly undeveloped and the government’s new liberal approach is nudging companies to invest in tapping them. The measures are expected to boost gas output by 35 million standard cubic meters a day and unshackle projects worth 1.8 trillion rupees ($27 billion), Oil Minister Dharmendra Pradhan had said when the policy changes were announced.
About 90 percent of the new spending would go to companies that provide services from drilling to testing and the laying of infrastructure.
Halliburton is positioned to participate in “the country’s ambitious plans to increase its domestic production,” the company said in an e-mailed response to questions. “India plays a crucial role for sustained development in the region for Halliburton.”
The Indian government’s initiatives will increase the pace of exploration, ONGC Chairman Dinesh Kumar Sarraf said.
ONGC will contract deepwater drill ships and dozens of jack-up rigs for a $5-billion development program in the Krishna-Godavari Basin, he said. The company intends to spend 11 trillion rupees by 2030 to raise output.
Reliance has held meetings with oilfield-services companies to restart work at four offshore oil and gas blocks, including one of India’s biggest natural gas discoveries, people with knowledge of the plan said in May. It plans to drill 21 wells in four offshore areas, including the deepwater KG-D6 block in the Bay of Bengal, the people said.
ONGC shares rose up 0.8 percent to 210.15 rupees in Mumbai on Monday, while Reliance gained 0.4 percent to end at 955.65 rupees.
India’s exploration binge still won’t be enough to compensate for canceled projects around the world as oil prices settle around $50-a-barrel of crude from more than $100 two years ago. Worldwide, the oil and gas industry will cut $1 trillion from planned spending on exploration and development because of the price slump, consultant Wood Mackenzie Ltd. said this month.
Investing during the current down-cycle ensures lower costs for explorers as well as future returns over four or five years once oil recovers, Technip India’s Patel said.
ONGC has reduced the cost of its Krishna-Godavari basin block by almost a third from earlier estimates of about $7 billion as prices slide for the contract rate for rigs and oilfield equipment and services.
Offshore jack-up rigs, which used to cost $80,000 to $90,000 a day, are now available for less than $50,000, ONGC’s Sarraf said. “We could say there is 20 percent to 50 percent reduction in the cost of goods and services.”
Despite the price competition, service providers are finding that an India strategy is critical given the scarcity of spending elsewhere. Finnish company Wartsila OYJ’s Indian unit sees opportunity here given the tough global environment.
“In the exploration segments, if projects are coming up of course it’s an opportunity for us,” Kimmo Kohtamaki, president and managing director of Wartsila India, said. “We have matching products and no one else is investing. Everyone is laying off, it’s a tough market.”
Moody’s Investors Service said it is keeping a stable outlook on the ratings of U.S. states as the economy’s expansion boosts government tax collections.
State revenue growth is anticipated to hold steady at about 4 percent in 2017, Moody’s said in a statement Monday, even as energy-dependent states including Alaska and Louisiana face budget deficits because of the decline in the price of oil over the past two years. The company said the impact has been less severe on those such as New Mexico and Texas with more diverse economies.
States have largely recovered from the toll of the 2007-2009 recession, which forced them to cut spending and raise taxes when expected revenue disappeared. Unlike local governments, states have “broad power” to steady their finances to weather economic routs.
“States have a number of tools to manage budgets and maintain liquidity, which reflect their sovereignty and an ability to create their own fiscal frameworks,” Nicholas Samuels, a Moody’s vice president, said in the statement.
Moody’s said the outlook could be upgraded to positive should states show sustained annual revenue growth of more than six percent, while a significant revenue shortfall could lead to a negative outlook.
Europe’s largest money managers are divided on whether to venture near the region’s stocks after the biggest-ever slump made them a steal, going by history.
Amid concern that U.K. secession threatens Europe’s political and economic stability, the Euro Stoxx 50 Index dropped 8.6 percent on Friday, led by a record selloff in bank shares, while volatility jumped. That dragged Euro Stoxx 50 valuations to an almost four-year low versus a gauge of global stocks. The index lost 0.2 percent at 8:53 a.m. in London.
It’s safe to say that after Friday, bulls are no longer expecting asset managers to flood the market with money even after hoarding the biggest cash piles in almost 15 years. While similar selloffs in the past have provided good entry points for the brave, wealth units at UBS Group AG, Lombard Odier, AXA SA and Zurich Insurance Group AG are among those saying this isn’t the time for bargain shopping.
“Sit tight for now is what I’d recommend,” said Caroline Simmons, the London-based deputy head of U.K. investment at UBS Wealth Management, which oversees about 32 billion pounds ($43 billion). “It will stay really volatile. There are a lot of risks that could come together. This was not the case in the euro crisis, Lehman, or the oil crash — whereas these events had wide financial-market implications, they didn’t have as great a potential to create a longer-term domino effect politically.”
Valuation has been part of the bull thesis on European equities since the financial crisis and, in isolation, Friday’s selloff strengthened that case, particularly through the lens of dividends. The Euro Stoxx 50 has traded with almost twice the payout ratio of the S&P 500 and Friday’s plunge pushed the rate up to 4.4 percent, the highest level in three years.
Banks are also inexpensive relative to recent history. Looking at U.K. lenders, the 21 percent decline in Lloyds Banking Group Plc pushed its price to 0.9 times book value, the lowest since 2013, while Barclays Plc’s 18 percent slump left it at less than half of assets minus liabilities. Overall, banks in the FTSE 350 Index are trading at 0.6 times book, roughly their lowest valuations since the aftermath of the financial crisis in 2009. The multiple for the Euro Stoxx Banks Index has fallen to 0.5 times book, the lowest since 2012.
Besides financial firms, some of the biggest losers in Friday’s selloff were European telecommunications companies, with Telefonica SA and Telecom Italia SpA falling more than 16 percent. Both now trade for less than 0.8 times sales, levels not seen since at least 2014. The full Euro Stoxx 50 fell below 1 times sales after spending most of last year above it, data compiled by Bloomberg show.
Europe’s equity market is no stranger to selloffs such as the one that hit stocks Friday. Shares dropped 7.9 percent on Oct. 10, 2008, as policy makers failed to convince investors they could control the fallout from the collapse of Lehman Brothers Holdings Inc. The Euro Stoxx 50 reached an almost 13-year low five months later. While the investment bank’s failure was followed by a six-year rebound, it saw significant interruptions in 2011 and then 2012 as Europe’s debt-laden economies requested bailouts.
Lombard Odier’s Bill Papadakis said he’ll wait to see how world leaders react to the Brexit vote before calling the bottom of the market.
“A common policy response could help cap the downside,” said the macro strategist at Lombard Odier, Geneva’s oldest private bank. The firm manages about 224 billion Swiss francs ($230 billion). “I would have to see signs before being confident about going forward. A sharp move downwards is guaranteed. I would monitor the situation closely before increasing risk.”
The response has been swift. Bank of England Governor Mark Carney said Friday that the bank is ready to pump extra cash into the financial system, the European Central Bank said it will give lenders all the funding they require, and the Swiss National Bank waded into currency markets. German Chancellor Angela Merkel has invited French President Francois Hollande, Italian Prime Minister Matteo Renzi and European Union President Donald Tusk to Berlin on Monday.
The combined effort should contain further declines, said Vontobel Asset Management, which is scouring the market for bargains. Deutsche Bank AG’s asset management unit sees the rout as a buying opportunity, according to chief investment officer Stefan Kreuzkamp, while Fidelity International’s Paras Anand said that the U.K.’s vote to leave the EU is not “catastrophic.”
Pierre Mouton, who helps manage about $9 billion at Notz Stucki & Cie. in Geneva, already has his eye on British companies including Wolseley Plc, which sells about two-thirds of its building materials and bathroom supplies to the U.S. and will benefit from a weaker pound.
“We should get some relief,” Mouton said by phone. “I would be surprised if we go down much further. I would be tempted to look at U.K. companies with large exposure to the U.S. outside of the European Union that are falling.”
For Zurich Insurance’s Guy Miller, it’s the increased potential for further political shocks that’s keeping him out of the fray.
“There’s always a knee-jerk reaction, but this particular case is profound,” said Miller, a chief market strategist on Zurich’s investment-management team. “Given the political landscape is changing, taking a bet on that is a risky move. Markets will stay volatile. You can get very badly caught out.”