Stay calm, said the chancellor. Markets paused for half an hour and then resumed their falls. George Osborne cannot be surprised. He spent the referendum warning of the hell and damnation that would befall the British people if they voted for Brexit. Words of reassurance are not credible from the mouth of an author of Project Fear.
Lord King, a former governor of the Bank of England, was right to say yesterday that Osborne’s threat to launch an emergency budget, raising income tax and slashing spending, was a low point of a referendum campaign that was dispiriting on both sides.
Indeed, Osborne’s idea of punishing the voters surely contributed to remain’s failure. His plans would not have passed parliament and, in any case, tax rises and spending cuts would be no way to fight the threat of recession. Voters knew as much instinctively. If a few waverers decided “up yours” was a suitable response, it was predictable. So was Osborne’s immediate retreat yesterday from the idea of launching an emergency budget. He is a lame-duck chancellor.
But, in the land of Westminster make-believe, Boris Johnson’s early morning pronouncement that “the pound is stable, the markets are stable” takes some beating. The man who could be prime minister within a few months was wrong on both counts. The pound fell another 3% against the dollar on Monday to $1.32, after Friday’s 8% plunge, and the share prices of UK banks were battered again. If you want the market’s view of consumer confidence in the UK, try that traditional bellwether, Marks & Spencer – down 20% since the referendum. Nobody could sensibly describe the position as stable.
In fact, the only reason why the FTSE 100 index looks remotely calm – down “only” 2.5% yesterday – is that it is stuffed with multinationals that make most of their money in dollars, which suddenly buy many more pounds, the currency in which FTSE 100 share prices are quoted. The big winners from Brexit, in terms of sterling share prices, have been Shell, BP, GlaxoSmithKline, AstraZeneca, Unilever, Diageo and so on. It’s just a currency effect.
Among companies whose profits and prospects rest on the UK economy, the tale is different. Most of the big housebuilders – Taylor Wimpey, Persimmon, Barratt – have fallen about 40% since Friday. Investors are alarmed by the possibility of falling house prices, a shortage of building workers from the EU and cancelled housing projects.
In the world of banking, Royal Bank of Scotland, down 25% at one point on Monday, has lost a third of its value since the referendum. Taxpayers’ 73% stake is worth £6.5bn less than it was last Thursday. If Scotland eventually separates from the rest of the UK, the carve-up of RBS will be messy and expensive.
The only asset class in which Johnson could almost point to stability is the gilt market. Investors are running towards UK government debt, not away from it. Yields on 10-year government debt have fallen from 1.3% to 0.95%. That, at least, is the “right” direction in the sense that the government can borrow more cheaply. Again, though, you have to scratch the surface. Osborne’s bogus threats have been exposed and the Bank of England will be doing all the recession-fighting in the form of lower-for-longer interest rates.
Scratching around for positives, King said sterling at $1.50 – the level of the eve of the referendum – was too high for the UK’s good anyway. He is right. The UK’s current account deficit hit a peacetime record of 5.2% in 2015, which is a dangerous level that could not be sustained indefinitely. A lower exchange rate, boosting exports and dampening imports, offers the most credible cure. If the cost is some upward pressure on inflation, there’s no better time than now to take the medicine. Foreign investors, if they could see the ingredients of post-Brexit recovery, would quickly return and the Bank of England would have greater room for manoeuvre on monetary policy.
That sketch of a recovery, however, requires competence in government. At the moment, we have remainers whose authority is exploded and leavers who, apparently, didn’t bother to think about what they would say if they won. If a lower pound offers opportunities, investors want to know the government is capable of seizing it. If not, there’s every chance they’ll keep selling.
Waking up to BHS and HBOS
What fun, another BHS inquiry. This time it’s the auditors, PricewaterhouseCoopers, which will be investigated, by the Financial Reporting Council (FRC), in relation to the department store retailer’s accounts in the last full year of Sir Philip Green’s ownership.
For good measure the FRC – previously seen by many as a sleepy policeman – will examine KPMG’s audit of HBOS in 2007, the year before the bank hit the rocks. That accident may feel like ancient history, but better late than never. As Andrew Tyrie, the chair of the Treasury select committee, said, the official HBOS report exposed the “staggeringly poor quality” of some of the bank’s loans. And, if tardiness over HBOS has encouraged greater urgency at the FRC in cases like BHS, so much the better.
