One of the features of the Brexit vote is that it shows economics doesn’t matter very much. At least not to the 52% who voted to leave the European Union, and who the pollsters tell us still largely feel as they did on 23 June 2016.
That seems strange when the debate about Scottish independence focused for much of the time on the possible economic gains and losses. But there was no doubting, when the Brexit votes were counted, that George Osborne’s Project Fear had been smashed on the rocks of public indifference.
Osborne warned that the Treasury’s best minds had reached a terrible conclusion: that leaving the European Union would knock 6% off economic growth by 2030, costing each household £4,300 a year.
Last week, Bank of England governor Mark Carney said the UK was already following the trajectory mapped out by the Treasury.
He said the UK had already lost almost 2% of predicted growth and 4% from household incomes. This translates into a £900 loss per household. Most of the damage, he said, was Brexit-related. The result is that the economy is £40bn smaller than it would have been without Brexit; it’s possible to show that this amounts to a £15bn loss of tax revenue, or £300m a week.
Liberal Democrat leader Vince Cable was appalled by this confirmation of all his worst fears. Labour MP and arch-Remainer Chuka Umunna was equally indignant that the experts had been proved right. He tweeted: “Brexit is already costing every person in this country hundreds of pounds in lower income, and we haven’t even left yet.”
The public, on the other hand, appeared to be nonplussed. This is partly because the loss is a notional one, based on economic forecasts that the Treasury and Bank of England have become notorious for getting wrong over the last 10 years.
More importantly, the Brexit vote was born of several factors unrelated to economics, such as reclaiming power from the European court of justice, or ending EU rules that block attempts to control the country’s borders.
This is an unfortunate situation, because what Carney has to say is important. It’s true, as the Brexiters say, that much of the loss to households flows from a one-off inflationary reaction to the lower pound, which pushed the cost of imported goods higher. Yet a cliff-edge Brexit featuring only a basic trade deal – something that remains a possibility – could trigger another fall in the pound, ushering in a second dose of import-led inflation.
Carney made this warning explicit in a speech last week that revealed the Bank is prepared to withdraw its plans for raising interest rates if this happens. Inflation, he said, had cut household spending power and accounted for around a third of the £900 loss. The remaining two-thirds was due to lost productivity – and that was largely due to a collapse in investment.
Figures from the Organisation for Economic Co-operation and Development documenting foreign direct investment show a 90% collapse in flows to the UK in 2017 compared with the previous year. Granted, the previous year was characterised by a strong recovery from a miserable 2014 and 2015. Nevertheless, a 90% fall in funds coming to the UK shows how fragile Britain’s reputation among corporate investors has become, and how positive sentiment can evaporate almost overnight.
Large domestic companies are of the same mind. They are the main losers from the Brexit vote and the costly trade and customs arrangements it could usher in. They are the most averse to making investment decisions until the situation is clearer. And even then, if it becomes obvious that a hard Brexit is the most likely result, with a customs deal no better than Canada’s, they might ditch their investment plans altogether.
This scenario is possible, and it’s right that Carney makes the cost explicit to the public. One day, they might want to pay attention.
Disney faces battle for fairtale ending at Sky
Comcast is threatening to scupper Rupert Murdoch’s fairytale ending with Disney. The cable and media group is plotting to make a knockout bid for 21st Century Fox’s entertainment assets, which Murdoch has agreed to sell to Disney. Murdoch’s Fox is a lucrative business, with assets spanning the X-Men and Deadpool franchises to a 39% stake in Sky and a 30% stake in US streaming service Hulu. Disney’s $52bn all-stock deal appealed to Murdoch more than Comcast’s original cash offer last year, which was 16% higher but raised questions over regulatory and tax hurdles.
But Comcast is not so easily deterred. It already has a £22bn offer tabled for Sky itself that would make it the world’s largest pay-TV company. Like Disney, however, Comcast has its eyes on global expansion and the rise of Netflix – which means taking a tilt at the wider Fox group.
Disney, meanwhile, needs Fox to supercharge its belated entry into the world of streaming, having already pulled its immense film catalogue – from Star Wars to Toy Story – off Netflix in the US in preparation for its own streaming service. Because Disney already owns 30% of Hulu, Fox’s stake would give it control of two outlets over which to spread its vast entertainment fare.
However, Comcast also owns major assets including the maker of Downton Abbey and Made in Chelsea as well as Pixar rival DreamWorks, creator of Shrek and Kung Fu Panda, and Universal Studios. It is well aware of the need for lots of content in a world dominated by streaming. Comcast spies global reach: only 9% of its revenues come outside the US, and pay-TV in its home market is hitting saturation and facing decline. Taking over Sky would make that 25% overnight.
The strategic rationales for Comcast or Disney buying Fox are both strong. Both will have to dig deeper in order to win.
FTSE 100 is no guide to UK economy’s health
How bad can things be? The FTSE 100 index is on a great run. The barometer of the nation’s biggest companies last week recorded new highs around the 7900 level. The round number of 8000 is in sight. Then prepare for the big one – 10,000. So banish your Brexit blues, and enjoy the vote of confidence in the UK.
Unfortunately, the above paragraph is complete rubbish. It is correct that the FTSE 100 is currently buoyant, but prepare instead to tear your hair out when a headline-seeking politician (and there will be one) claims the achievement of 8000 is some form of triumph for the UK economy. He or she will be spouting nonsense.
“The characteristics of the FTSE 100 index make me marvel at people who use the index as a product or guide to enable them to ‘invest in the UK,’” wrote Terry Smith in this year’s letter to investors in his Fundsmith fund. He’s right. As he pointed out, four of the top 10 constituents gave a break-down of the UK contribution to their total sales last year and the numbers were: 1% at Rio Tinto, 3.8% at GlaxoSmithKline, 8% at AstraZeneca and 14.5% at Vodafone.
Therein lies the clue to one factor behind last week’s uptick: the pound has been weak, thereby inflating the value of dollars and euros earned overseas when translated into sterling, the currency in which share prices are quoted in London. Expressed in dollars, the Footsie is still well below its highs.
The idiosyncratic make-up of the FTSE 100 doesn’t matter in the sense that everyone knows what they’re getting, or should. Even the London Stock Exchange calls it “London’s global benchmark”.
Is it even a good global index, though? As Smith also wrote, only 1.8% of the FTSE 100 was in information technology at the end of last year, versus 23.9% for the main US index, the S&P 500. So, if you believe the IT sector is best placed to reflect global growth in the decades ahead, ignore the Footsie.
