Wednesday 22 February 2017

Britain voted for a leap into the dark, and it took us with it

Published 25/06/2016 | 02:30

A British flag flutters in front of a window in London, Britain, June 24, 2016 after Britain voted to leave the European Union
A British flag flutters in front of a window in London, Britain, June 24, 2016 after Britain voted to leave the European Union

Yesterday's market crash was almost certainly overdone. That's the good news. The bad news is that we are staring down the barrel of a new recession, in a country where we've only just gotten off our financial knees.

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On the markets, group think among currency traders had driven huge swings over the seven days before the vote.

First, last week traders collectively gambled that a Brexit would happen, but then from last Thursday they dramatically changing tack and bet the house on Remain.

The markets were as wrong about political risk in 2016 as they were about financial risk in 2008. Caught out in the early hours of Thursday they had to correct with violent speed.

Sterling was pounded unmercifully, dropping to its weakest level against the dollar since 1985, and in currency markets the volumes of activity were high.

Punch drunk traders arrived at something like a standstill in the afternoon, recovering, slightly from the worst of the swings.

Markets will eventually find their level, such as it is. It's worth noting that Britain's FTSE 100 index of leading shares actually finished higher yesterday than on Friday last week.

That's the good news. The bad news is that once things do start to stabilise, we are going to have to face up to a frightening new reality.

Britain voted for a leap into the dark on Thursday, and took us with it.

The referendum result has created unprecedented levels of uncertainty, and that will come with a real price.

All kinds of investment decisions, from takeover deals to plant and machinery purchases have been put on hold this year, ahead of the vote.

That has mainly affected the UK, but we haven't escaped entirely.

It's not a coincidence that Irish exports, which had been the engine of recovery here, slowed in the months after the ballot was called.

Temporary postponement of investment is one thing.

The problem now is that we must expect the current drift to go on far longer, and worsen, as the slow, and very likely nasty, process of negotiating a formal UK exit gets under way.

The UK is our biggest trading partner, an investment hiatus there will mean less income for export businesses here.

The plunge in the pound, much of which will be sustained, will exacerbate that even further because we'll get less in real terms even for the trade that remains. Border posts and trade barriers are not the immediate threat - although there is a real danger they become it in time.

The more immediate risk is that the UK will now plunge into recession, and take us down with it. All of the ingredients for an economic shock are in place.

Investment there is on hold, the weak pound might help UK exports but will hammer spending power.

The fall in sterling will hit London house prices, long a proxy for perceptions of household wealth.

All of which means a recession in Britain is now an imminent danger.

Even if we don't import their financial crisis directly Irish households and business, many barely coping with legacy debts, may well now rein in spending too - with inevitable consequences for domestic spending here.

Irish Independent

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