It’s time we gave this a serious thought

UntitledWith the impending EU referendum vote on June 23, the activity on both sides of the campaign is reaching fever pitch. I’m pro-EU and with all its flaws, its still a union which allows us to trade freely in the world’s largest trading blocs. And for the UK, this trading bloc is vital given the level of our exports into the EU (with about half of all UK exports going to the EU).

There have been many studies recently outlining why leaving the EU would be disastrous / catastrophic etc. etc., so I won’t go into all the metrics and people’s arguments that those studies are projections and we all know how projections can go wrong (no one projected the downturn of 2008!). But I would like to point out some highly likely outcomes in case we take the disastrous decision of leaving the EU. Some possible scenarios below:

  • Cost of living could go up as the sterling depriciates (based on recent market movements – so not projections)
    • Sterling has seen a huge amount of volatility in recent months, with recent reduction in value driven by market worries about UK leaving the EU
    • Insurance against moves in sterling against the dollar has reached the levels of 2009
    • The cost of your basket at the supermarkets could go up, holidays will become expensive
  • Tax receipts would be hit hard, investments into the UK could be reduced, consumer spending could take a hit – all this takes me me back to the not-so-good-memories of 2008
  • This will be a big shock to the economy when we are just getting out of the previous recession
    • Various estimates suggest that the UK economy, along with the EU economy, is expected to shrink for the next few years
    • It’s the uncertainty and negative sentiment that hits the markets more than the fundamentals; the market sentiment is against UK leaving the EU

Brexiteers call this fear tactics / scaremongering, but this is the reality we’ll have to live with folks. Consequences are not the most attractive, with potentially significant negative implications on the economy and even a question mark over the union of the United Kingdom (will the Scots rethink their decision of staying the UK if we were to leave the EU?).

As Great as Great Britain is, the world now doesn’t work on an isolated basis. We live in a connected global economy with a globally mobile population and shared economic fortunes (at least for the more developed economies with spill over effects of ill health of one felt on another ). We may be the world’s fifth biggest economy, but there’s a reason we occupy that position in the world and receive the investments we do – the UK plays a vital role in a connected world and is at the centre of activities of some of the most important sectors (e.g. finance, tech). We dare not move away from that advantageous position.

It’s time we think through this most important decision of our generation (or for many generations to come). This is a structural shift, not a short term decision while we assess its impact. This could change our world as we know it – working together to address the issues of today to build a strong future is far better than being observers from the outside as the world reshapes itself, without us.

 

 

Source: Photo courtesy StrongIn.co.uk

 

Advertisements

Ensuring a sustained, well balanced economic recovery

There’s one big outstanding question in my mind re the sustainability of the UK economic recovery. Agree that the economy is doing much better than it has done over the last few years, agree that the confidence has increased (both business and consumer) and agree that we are seeing a record amount of entrepreneurial activity in the economy (read start ups). But how sustainable is this growth given what I believe could hamper the consumer spending power over the coming months and years?

There are some key economic, policy and geopolitical changes that will hit the families’ real income. Interest rate rise is going to add to the monthly mortgage and other credit bills. The ongoing price wars by the supermarkets is unsustainable. The conflict in the middle east is, at some point, going to hit the oil production and supply.

All of the above and more (read recent price hikes in rail fares for 2015 and other inflation linked annual price rises) will have a significant impact on the disposable income of most families. Even more challenging would be the timing of of some / all of the above (potentially in quick succession of one another). Families will have to adjust and adapt their monthly spend in order to accommodate these which will in turn impact their ability to sustain the level of consumer spending we have seen since last couple of years.

The saving grace would be an increase in real wages – something that the working population has not seen for many years now. UK has become a hot spot for start ups in Europe and there has been a steep rise in the number of entrepreneurs over the last 2-3 years, a trend that I believe has been a result of the below inflation (or even stagnant) salary / wage rises.

Government, policy makers and businesses alike must ensure that the economy is well positioned to sustain these monetary shocks, specially given the probability of all of these happening in close proximity with each other.