Sterling UK borrowing
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How to ride the pound sterling rollercoaster through a no-deal Brexit

Sterling has been particularly sensitive to significant developments in Westminster and Brussels – analysts and investors are watching closely.

The value of the pound affects the price of our imports, such as food and raw materials, and our exports, such as cars. So while a fall in sterling’s value might help exporters, the knock-on effects are that our weekly food shops and our overseas holidays are likely to become more expensive.

So how did we get into this situation, and what should investors do?

The UK economy was relatively stable during 2018. The labour market has strengthened, supported by a benign global growth backdrop, allowing the Bank of England to raise interest rates for the first time in a decade.

However, it’s clear that the UK has suffered a bout of idiosyncratic economic weakness since the middle of 2016, which has weighed on the exchange rate and interest rates.

The recent political instability has cast an even greater shadow of uncertainty over the UK. In fact, chances of a no-deal Brexit have probably increased slightly in the last few weeks thanks to the parliamentary deadlock. Although the majority of MPs do not want that outcome, the fear is that May will be faced with a cliff edge before a deal is done.

Parliament will no doubt keep trying to pass a deal eventually, but, as history shows, policymakers are notoriously difficult to predict, meaning that deriving an outlook for the UK feels like peering into the fog through a kaleidoscope.

Focusing on the wider outcome of Brexit on our society and economy is important, but investors will be equally concerned (if not more so) with the impact on their portfolios.

The stark fall in sterling after the EU referendum reminded Britain how much its currency matters, and why investors are right to prepare for periods of poor performance. One strategy to guard against downturns is to be globally diversified, so many investors (ourselves included) will likely have chosen to hold a larger allocation of overseas currencies.

But that doesn’t mean simply ditching sterling. Indeed, we also worry about the fate of the euro if negotiations turn sour. It is possible that the value of the euro will also slide against the US dollar even if it gains against the pound. This could have ramifications for single currency investors or those doing business on the continent.

And there is a place for sterling in your portfolio. Despite all the politics, we still think that there’s a chance of the final deal resulting in a softer Brexit, or at least a less negative exit than markets have been pricing in.

If a final deal is reached, we anticipate higher interest rates, a stronger pound, and a moderation to inflation expectations. Paradoxically, this outcome may support the euro as well, at least in a global context.

We believe that once a decision on the deal is made, investors could benefit from this subsequent rebound in sterling. If this arrives in the next few months, as expected, British holidaymakers may be in for a pleasant surprise as the pound in their pocket packs more of a punch.

However, a no-deal scenario is still a possibility, and it would likely create political and economic turmoil. We would expect to see exchange rates plummet, with the pound potentially being worth less versus the euro and dollar, leaving a monetary policy dilemma for the Bank of England.

With less room for the Bank to manoeuvre at present, maybe we would not see a repeat of the interest rate cut and quantitative easing which followed 2016’s referendum result.

With such uncertainty, the rollercoaster ride is likely to continue. Whatever happens, keep an eye on sterling – it’s in for a bumpy ride.

Source: City AM

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Negative rates could be on the cards in no-deal Brexit chaos

Interest rates could be slashed into negative territory for the first time in history to combat the fallout from a chaotic no-deal Brexit, a former Bank of England policymaker has warned.

David “Danny” Blanchflower – who sat on the Bank’s Monetary Policy Committee (MPC) from June 2006 to June 2009 – told the Press Association that policymakers may be left with little option but to take rates below zero if a no-deal Brexit sends shockwaves through the economy.

In a savage critique of the Bank’s recent scenario analysis of Brexit, he said Governor Mark Carney and his team were “stupid” to indicate that rates could even rise in a disorderly withdrawal.

Bank of England Governor Mark Carney has come under fire over Brexit analysis which warned that rates could rise to 5.5% (Daniel Leal-Olivas/PA)

It comes after the Bank’s controversial “doomsday scenario” report, published at the request of MPs on the Treasury Select Committee, warned that interest rates could rise as high as 5.5% if a plunging pound sent inflation soaring.

Mr Blanchflower said: “It was stupid what they said.

“That was a big error. It would kill the British economy stone dead.

“The first thing you would have to start thinking about would be negative rates.”

The British-born economist, who moved to the US in 1989, said the bank had “very few arrows in the quiver” to boost the economy, with rates at just 0.75% having only recently been lifted off all-time lows.

0.75%
Current Bank of England base rate

He said this would mean negative rates “have to be on the table, because you’d be trying to encourage people to spend and not save”.

His comments come after current MPC member Gertjan Vlieghe also took aim at the Bank’s Brexit analysis, saying in a speech earlier this month that rates were more likely to be cut than hiked in a no-deal scenario.

The warning over negative rates confirms that the UK could be heading into uncharted economic territory if a deal is not secured.

While the financial crisis was unprecedented, the Bank at least had plenty of room to cut rates to help contain the fallout.

But Mr Blanchflower – a lone voice on the MPC calling for rates to be cut in 2008 when others failed to see the scale of the recession on the horizon – said the Bank could also look to rekindle its quantitative easing programme again if needed.

He said it could “broaden out what it buys” under QE, perhaps looking to buy student loans or property.

Whether attributable to Brexit or not, there’s a slowdown coming

David ‘Danny’ Blanchflower

But monetary policy alone would not be able to fix the crisis that would be sparked by a cliff-edge Brexit, with government and fiscal measures also vital, he said.

“The obvious thing would be to cut VAT by five basis points, increase spending like there’s no tomorrow and scrap austerity,” he said.

While the Bank’s last inflation report kept open the prospect of further rate rises, Mr Blanchflower said hikes were “dead in the water”.

With the global economy slowing and growing whispers of a US recession around the corner, he said Brexit was coming at a bad time.

“Whether attributable to Brexit or not, there’s a slowdown coming,” he warned.

Source: Express and Star

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No-deal Brexit would take a chip off UK home values

Britain’s over-valued housing market will undergo a modest correction if the country leaves the European Union at the end of next month without a deal, a Reuters poll found, with London being affected to a greater degree.

Negotiators are still scrambling to reach agreement, and if they fail then home prices in the capital, which has long been a magnet for foreign investors, will fall 3 percent in the six months after the March 29 split.

Nationally, prices will drop 1 percent, the Feb. 13-20 poll found.

“There will be a palpable shock to the UK economy in terms of GDP, inflation, job creation etc,” said Tony Williams at property consultancy Building Value.

He says prices in the capital would fall 10 percent if there were no deal, the most pessimistic forecast.

“This will spill over dramatically to the residential market, with London bearing the brunt given the international catchment of prospective buyers.”

Since the June 2016 referendum decision to leave the EU, Reuters polls have consistently said a no-deal scenario would knock the economy, equities, housing market and sterling.

However, a dip in the currency – a recent Reuters poll said sterling would fall 5-10 percent if there was no agreement – would make property cheaper for foreign investors, likely offsetting some of the uncertainty.

If an agreement is reached, and most economists think it will be, house prices will rise 1.5 percent nationally and 0.5 in London in the six months after.

The wider poll of 25 market watchers said national home prices would rise 1.5 percent this year and 1.8 percent in 2020, both weaker than forecast three months ago. In 2021 they are expected to increase 2.3 percent.

In London prices are predicted to fall 2.0 percent this year, much sharper than in the last poll, and then rise 0.5 percent and 2.5 percent in the following two years.

“Prices have clearly come off the boil of late but on the assumption that the UK does not leave the EU without a deal, there is scope for the resumption of a modest upward trend,” said Peter Dixon at Commerzbank.

Reflecting the uncertainty, the range of forecasts for 2019 was wide, between a 3 percent fall and a 0.5 percent rise. Nationally, it was even wider – ranging from a 3 percent rise to a 3 percent fall.

OVERVALUED

With uncertainty still surrounding the Brexit outcome, nine of 16 respondents said they think turnover in London homes will fall this year while only two expected a rise. Nationally, 10 said turnover would stay the same, six said fall and two said rise.

“Sales levels will likely stay the same in 2019 as 2018 across the UK although this will vary across the regions,” said Leslie Schroeder at property consultancy Carter Jonas.

“We expect that London and the South East will see a slight fall in overall levels compared with 2018, again as affordability weighs heavily on the ability for average UK earners to move and buy houses.”

When asked to describe the level of London house prices on a scale of 1 to 10 from extremely cheap to extremely expensive, the median response was 8. Nationally they were rated 7, where it has been for a few years.

Those high ratings are unsurprising as the annual average British salary is around 30,000 pounds but the average asking price for a home in Britain was 300,715 pounds this month and more than double that in London, property website Rightmove said.

So although borrowing costs are currently very low and not expected to rise much in the coming years, prospective buyers trying to get on the property ladder will struggle as prices continue to rise, despite them increasing more slowly this year and next than wages and general inflation are predicted to.

“The fundamentals of the UK housing market remain as they are: lack of supply; a growing population; cheap money – a Brexit of any flavour will not dent those fundamentals,” said Russell Quirk at online estate agent eMoov.

Source: UK Reuters

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Scotland has second-highest growth in UK, analysis suggests

Scotland’s economy grew by 1.7% in 2018, according to academic estimates, compared with the UK average of 1.4%.

Scotland’s economic growth in 2018 was the second-highest of any UK region, with only London growing more, according to academic estimates.

Although the UK’s economy grew by just 1.4% in 2018 – its lowest rate in six years – Scotland’s economic growth of 1.7% meant it bucked the national tend, new estimates show.

Regional estimates, by academics at the Economic Statistics Centre of Excellence, suggest Scottish growth was up from 1.6% on 2017, while average UK growth fell from 1.8% in the previous year.

SNP MSP Gordon Macdonald welcomed the figures and said: “This analysis shows that the fundamentals of the Scottish economy are strong.

With economic growth rising in Scotland and falling elsewhere across the UK, Tory claims that Scotland is somehow uncompetitive have been thoroughly debunked

Gordon Macdonald MSP

“With economic growth rising in Scotland and falling elsewhere across the UK, Tory claims that Scotland is somehow uncompetitive have been thoroughly debunked.

“But Brexit continues to be an enormous threat to jobs and businesses across Scotland – and the public will be concerned at the complete lack of clarity this close to leaving the EU.

“The SNP in government are offering stability and certainty through our budget which supports jobs and businesses.

“The UK Government must do the same by ruling out a no-deal Brexit that would be economically disastrous.”

London continues to far outperform the rest of the UK, with estimated growth of 2.9% in 2018.

In addition to Scotland, the North West, South West and East Midlands saw growth estimates for 2018 slightly higher than the UK as a whole.

Substantially behind the UK average were Wales, Northern Ireland and the East of England.

Source: Express and Star

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Cabinet minister warns of ‘adverse effect’ of no-deal Brexit

Crashing out of the European Union without a deal would have a “very adverse effect” on the UK’s economy, security and union with Northern Ireland, a Cabinet minister has warned.

David Gauke suggested he would back an extension to Article 50 if a deal between the UK and EU was not reached, and said he expected the Government to act “responsibly” if the current deadlock prevailed.

And the Justice Secretary told BBC Radio 4’s Today programme that he hoped it would be made clear in the next 10 days that the UK is in a position to leave with a deal on March 29.

But he said: “If not, then we will have to, in my view, act responsibly and make sure that this country, the economy is protected, our security is protected and the integrity of the Union is protected.

“I have very grave concerns about the consequences of leaving without a deal.”

I have very grave concerns about the consequences of leaving without a deal

David Gauke

Mr Gauke added: “I think the idea of leaving without a deal on the 29th March would be one that would have a very adverse effect, to put it mildly, on our economy, on our security and on the integrity of the Union and I think my position on that is very clear.”

He has previously suggested that Brexit might have to be delayed beyond the scheduled exit date.

Mr Gauke said he hoped a deal would have been reached by the next round of Commons votes on February 27, which has been described as a “high noon” moment for the future of Brexit.

“I would hope and expect that the Government would act responsibly and consider the situation. I hope that by the time we get to that point that there will have been a deal reached with the European Union and the House of Commons.

“If not, I think my position is very clear and I think the consequences of leaving without a deal would not be in the national interest.”

The next round of Brexit votes on February 27 has been described as a ‘high noon’ moment (Kirsty O’Connor/PA)

Business Minister Richard Harrington said he did not believe Theresa May would pursue a no-deal Brexit.

He told BBC Radio 4’s Week In Westminster: “I actually think, when it comes to it, she will know the disaster that a hard Brexit would be for the British economy and I don’t think she’ll do it.

“No Government can stand by and watch a country plummet earthwards because of a political dogma of a minority of a minority, which is what the ERG are and the people that are pressuring on that end.”

Mr Harrington also said he would back moves to give Parliament the power to take no-deal off the table at the end of the month if it seemed likely the UK would crash out of the EU, and could resign if necessary to back the amendment.

And he warned: “There are a significant number of us who feel the same and I think the Chief Whip and the Prime Minister should know that. We don’t make the noise of the ERG but that doesn’t mean quietly that we’re not there.”

Tory former chancellor George Osborne urged Mrs May to take the “threat” of a no-deal Brexit off the table.

He said keeping the option open was “totally unrealistic”, telling the programme: “I also think it’s extremely damaging to our economy at the moment because it’s forcing all sorts of companies around the world to put into action their contingency plans.”

Meanwhile, the Times reported that female MPs have been forced to move house and hire bodyguards because of tensions over Brexit.

The newspaper said one female parliamentarian was advised by police not to travel alone at night, while another was told not to drive herself and a third was warned against running in her local park.

A number of cross-party MPs have reported experiencing abuse in recent weeks.

Among them was pro-EU Conservative MP Anna Soubry, who was called a “Nazi” by pro-Brexit protesters as she was interviewed outside Parliament last month.

Meanwhile, the Government has stepped up its information campaign on Brexit preparations.

On Saturday, the Government began running a series of adverts in local and national newspapers and websites as part of a campaign to explain what leaving the EU will mean for citizens and businesses.

Source: Express and Star

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‘No deal’ Brexit prompts expectation of increase in demand for business loans

As predictions have emerged of an upsurge in borrowing demand from SMEs if a ‘no deal’ Brexit occurs, owners of small businesses are being urged to fully acquaint themselves with the terms of a personal guarantee backed loan, before signing on the dotted line.

Todd Davison, director of Purbeck Personal Guarantee Insurance said, “It is widely anticipated that there will be an increase in demand for loans as SMEs look to introduce additional working capital buffers in a bid to ride out any impact on business following a “no-deal” Brexit.

“Additional funding to aid cash flow may help to offset downturns in trade or disruption within the supply chain. But the reality is that most commercial funding will need a Personal Guarantee and this commitment should not be taken lightly.

“As the UK’s only provider of Personal Guarantee Insurance to SMEs, we would urge the Directors of SMEs to fully consider their options and the risks, particularly in the current uncertain economic climate.   It’s vital Directors seek independent advice, and ensure they have investigated what alternative funding may be available.  If a Personal Guarantee backed business loan is the right solution, they should ensure they’re comfortable with all the terms of the guarantee.”

Top facts to check before signing a personal guarantee for a business loan:

  • How will the lender enforce the guarantee?
  • Can the lender serve notice or seek payment on demand?
  • What exactly constitutes a default?
  • Do the terms allow for any remedy period upon default?
  • How will your net personal assets be assessed prior to the giving of the guarantee, and is this is likely to change?
  • Does the contract state that the lender must exhaust every other avenue before making demands on you?
  • Have you considered the cost of obtaining personal guarantee insurance?

Todd Davison concludes: “Personal Guarantees are likely to be requested by every business lender. Directors of small businesses should be clear on the terms of the guarantee, and should have contractual clarity on all eventualities. They should be as genuinely objective as they can about the financial prospects of their business and its commercial value too. It’s essential to remember that a Personal Guarantee is not a hypothetical assurance, creditors can and will enforce them.

“Because they significantly increase risk for the borrower, Personal Guarantees can cause enormous stress. It’s therefore advisable to get Personal Guarantee insurance against the risk that the Guarantee is called by a lender. It will offset any outstanding obligations called in under a Personal Guarantee. The level of cover is based on a fixed percentage of the Personal Guarantee the company director wishes to insure and this is dependent on whether the corresponding finance facility is secured or unsecured.”

Source: London Loves Business

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UK economy flat-lines as Brexit nears, firms cut jobs – PMI

UK economy risks stalling or contracting as Brexit nears and a global slowdown worsens, with firms in the dominant services sector reporting job cuts for the first time in six years and falling new orders.

Sterling slipped to near two-week lows against the dollar after a leading gauge of the world’s fifth-biggest economy, the IHS Markit/CIPS UK Services Purchasing Managers’ Index (PMI), fell to 50.1 in January from 51.2 in December.

That marked the PMI’s lowest level since July 2016 and was barely above the 50 mark that separates growth from contraction. A Reuters poll of economists had expected a reading of 51.0.

Britain’s economy defied forecasts from some economists that it would go into recession after the 2016 referendum vote to leave the European Union. But growth slowed sharply in late 2018 as worries mounted about an abrupt, no-deal Brexit.

Overall, the survey suggested Britain’s economy is flat-lining after losing momentum late last year.

“The risk is that activity softens further — firms will become increasingly risk-averse and implement contingency Brexit planning,” ING economist James Smith said.

Tuesday’s figures are likely to worry Bank of England officials ahead of their latest interest rate decision announcement and new forecasts for the economy on Thursday.

The report adds to other signs that Brexit — scheduled for March 29, less than eight weeks away — is taking its toll on businesses and consumers.

Prime Minister Theresa May, under pressure from her own Conservative Party, wants to reopen her withdrawal agreement with the European Union to replace a contested Irish border arrangement, something Brussels has rejected.

Investors are urging the government to ensure an orderly exit from the club Britain joined in 1973.

On Monday, a Deloitte survey of chief financial officers showed appetite to take on financial risk had fallen to its lowest level in nearly a decade due to fears of “the hardest of Brexits” and rising U.S. protectionism.

That caution was evident in Tuesday’s survey, covering the bulk of Britain’s private sector economy.

New orders fell for only the second time since the financial crisis, while employers cut jobs for the first time since late 2012 — around the last time Britain flirted with recession.

“The survey results indicate that companies are becoming increasingly risk-averse and eager to reduce overheads in the face of weakened customer demand and rising political uncertainty,” Williamson said.

New export orders contracted at the fastest pace since records for this part of the PMI began in September 2014.

Source: UK Reuters

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No-deal Brexit could harm EU economy

A no-deal Brexit could have serious consequences for the European economy even if the direct impact on international trade may prove limited for the European Union as a whole, Bank of Italy governor Ignazio Visco said on Saturday.

In a speech delivered in Rome, Visco, who sits on the European Central Bank governing council, also said that “any financial markets malfunctions could have major repercussions for all the countries involved and this issue is currently being looked at very closely”.

Source: UK Reuters

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Business impact of no deal Brexit on each region of UK revealed – CBI

The CBI has set out the impact of a ‘no deal’ Brexit on business, across every region and nation across the United Kingdom.

The analysis of government figures underlines the importance of no deal being taken off the table to prevent economic fallout and protect jobs and living standards.

Following last week’s Brexit vote, where the Prime Minister’s deal was defeated, Theresa May gave a statement in the House of Commons on Monday outlining the government’s next steps on Brexit.

Responding to the vote and the statement, the CBI has been clear that a March no deal must be taken off the table. This was backed up with CBI’s fresh analysis on the long-term economic impact of a ‘no deal’ Brexit which included over 40 real-world case studies of companies in every UK region outlining why no deal would be so damaging for their business. Shared concerns include border delays destroying carefully built supply chains and extra costs and tariffs damaging competitiveness.

Read CBI’s latest no deal regional analysis here.

While taking a March no deal off the table would provide some much-needed respite for many businesses, it is clear that the Brexit deadlock will only be broken by a genuine attempt by all MPs to find consensus and compromise. Next week will see MPs debate a series of amendments in response to the Prime Minister’s statement on the government next steps on Brexit, including proposals to rule out a March no deal. Those amendments selected by the speaker on Tuesday 29thJanuary will be voted on by MPs later that evening.  Following the vote, the CBI will be consulting its Chairs Committee on Wednesday to help inform next steps.

Source: PES Media

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Bank must make right call on interest rates if no-deal Brexit, Mark Carney says

The Bank of England governor says ‘it’s not automatic which way policy would go’ if Britain crashes out of EU.

Interest rates will not automatically go up or down if Britain crashes out of the European Union without a deal, the governor of the Bank of England has said.

Speaking at a panel at the World Economic Forum in Davos, Mark Carney said: “It’s not automatic which way policy would go in the event of a hard Brexit.

“And we’re remembering that we’re not predicting that, but we’ve got to be prepared for that”.

MPs are set for another crunch vote on the Prime Minister’s so-called “Plan B” Brexit deal on January 29, exactly two months away from Britain’s scheduled departure from the EU.

Theresa May’s first deal was rejected by Parliament by a majority of 230.

He said if the UK goes “through a period of de-integration, de-globalisation and reduction in trade openness” it would be “akin to a supply shock to the economy” with both demand and supply declining and currency and tariff pressures on inflation.

In those circumstances, he said the Bank “has to make the right judgment about the right path of bringing inflation back to target while doing what it can to support. But it is not an automatic approach.

“Particularly at times when there are big changes, you have to have some constants and for a central bank there are two constants: have a financial system that functions, which we would have if that were to happen, and keep your focus on your democratically given mandate, which is to achieve the inflation target.”

Inflation last month fell to 2.1%, within touching distance of the Bank’s 2% target.

Mr Carney also said that British businesses cannot completely prepare for a no-deal Brexit due to a lack of infrastructure at UK ports.

“There are a series of logistical issues that need to be solved, and it’s quite transparent that in many cases they’re not.

“So, port infrastructure is not there, border infrastructure is not there to the extent that it would need to be from jumping from an absolutely seamless trading environment to one with frictions that aren’t just tariffs, but are rules of origin of products, safety standards and other inspections that would need to be done.

“There is a limited amount businesses can do to prepare if there are going to be substantial delays on the logistical side”.

He used the example of logistics and supply issues that could arise for UK carmakers from a no-deal Brexit.

“If you are a car plant that relies on 40 18-wheelers [trucks] coming through Dover a day, and they have to show up within minutes of each other in order to meet the just-in time-requirements of the plant, you can’t stack things up all over Wales in order to ensure that you can continue to run it for months. That’s just reality.”

At the panel, the audience was asked for a show of hands to indicate if they were in favour of a second Brexit referendum. Mr Carney abstained, but UBS boss Sergio Ermotti raised his hand.

Source: Shropshire Star