“Well, that's another nice mess you've gotten me into!"

Friday 16 June 2017

In the wake of the General Election shock last week, which saw the Conservatives cut their own majority by calling a snap vote, businesses in Jersey are working through the implications.

With a few days having passed to pause and take stock, we thought we would take a closer look at the immediate economic implications of ‘May’s mess.’ The analysis comes from Oliver Stones, Executive Director at Quilter Cheviot:

"There have already been a number of seminal moments of Laurel and Hardy-esque lunacy since the UK General Election ‘disappointment’ for the Conservative Party. One of them must be Monday night’s TV lambasting of Jacob Rees-Mogg by Jon Snow, when the Eton and Oxford educated member for North East Somerset was caught in the spotlights arguing that a ‘mess’ (as St Theresa-the-Humble referred to the election earlier in the day in PM Question Time) did not actually constitute a ‘shambles’. This was not only semantics taken to the extreme, but an argument from a well-educated politician that could only attract scorn and derision from serious viewers.

But what really encapsulated this whole mis-judged, badly timed and ill-understood mess was the interview that the larger-than-life Eric Pickles gave on Radio Four the day after the election. The 25-years member for Brentwood, Essex, a life-long Conservative, had stood down in this election and had appointed himself to the inner-circle of election ‘advisers’ to PM May. After predicting a post-election 80-plus Conservative majority in the Commons, he said in a shocked Keighley accent; “I have absolutely no idea how this happened” — genuinely it seemed, and without the slightest idea or desire to even speculate or conjecture that there might be a serious root cause to the yawning chasm between reality and political arrogance.

Without wanting to be smart-after-the-event or wise-in-retrospect many people, including myself,  did in fact have more than a whiff and inkling of an idea that indeed an upset was on the way again, that there was a strong potential for a  Brexit ‘protest vote’ backlash that would manifest itself at last Thursday’s vote. The Brexit referendum last year split the country in two — on a certain level of scalability — it even spilt families down the middle. Did PM May have any idea that every time she said Brexit was “the will of the British people” it ossified hostility amongst the other half of the UK who had voted to remain in the EU, irrespective of their historic party allegiances? How was it that her campaign managers had not spotted this simple fact?

So now the time for the I-told-you-so and recrimination is over, we have to deal with the situation at hand. Economically it’s not great in the UK, which was already feeling the headwinds of uncertainty in the global economy. Household expenditure on Monday fell -0.8%, the largest fall since 2013; manufacturing and industrial production numbers in the UK last week were truly dreadful, falling significantly into negative territory; and even household construction numbers declined dramatically in the face of increasing demand for houses. To top it all, today we have seen a spike in UK CPI inflation to a 4-year high of 2.9%, nearly 1% above the Bank of England’s 2% ‘acceptable’ level for inflation. One can understand the anger of that UK-based nurse, who has been handed a 1% wage rise, being told by PM May that money doesn’t grow on trees. No wonder that there has been a 90% fall in EU applications for nursing posts, surely just the start of a trend. So the economic backdrop to the UK unhappily and symmetrically matches the woeful political backdrop, as we enter the critical initial talks on the UK’s withdrawal from the European Union.

Alan McIntosh (Chief Investment Strategist at Quilter Cheviot) made the fascinating prognosis post the messy election that given the new political and current economic backdrop in the UK, we probably should stop talking about a ‘hard’ or ‘soft’ Brexit, as the UK is no longer in the driving seat. The UK no longer has the luxury of defining their collective fate and almost certainly has not now the remotest chance of cherry picking trade deals. Immigration and the free movement of labour could be the first casualty or compromise of an EU-dominated discussion, with their first demand being the right of EU nationals’ continual UK abode. The EU will ‘call the shots’ not the UK, and there will be a growing call within the UK for not just a Tory / DUP attendance at the discussions, but a much wider multi-party attendance to represent Westminster.

Meanwhile, markets behave as though they are trying to absorb all the facts and understand the many ramifications. The FTSE 100 is stable so far at 7,500, Sterling has rebounded to the 1.27 level versus US $, and even UK 10-year Gilt yields hover around the 1% level, giving almost a déjà vu feeling of the post-EU referendum feeling almost exactly a year ago.

But perhaps we should not be lulled into the sense of calm or be overly sanguine over how we will ‘muddle through’ somehow, and make some stark choices. It is fascinating to see that central banks’ holding of ‘physical gold’ is at its highest since 1999. That tells us that there could be choppy waters ahead over the summer, and it is precisely for that reason that we also hold gold for our clients as well as an overweight in overseas equity, depending on the client’s risk profile. US interest rates are about to rise, international confidence in the UK has been shaken to the bone and the election mess continues to play out its hand. Perhaps we should end with that Groucho Marx quote, now most appropriate to the UK’s membership of the EU: “I Don’t Want to Belong to Any Club That Will Accept Me as a Member”.