Isolation is not good for me…Brexit a year on

I wonder if Boris Johnson and our beloved Nigel Farage listen to Fool’s Garden Lemon Tree song every morning. I feel the song was written for them by the Prime Minister Theresa May (take few minutes to read the lyrics and imagining Theresa 10 Downing Street with her ink and paper):

I’m sitting here in a boring room, it’s just another rainy
Sunday afternoon. I’m wasting my time, I got nothing to do.
I’m hanging around, I’m waiting for you,
But nothing ever happens – and I wonder.

I’m driving around in my car, I’m driving too fast, I’m
Driving too far. I’d like to change my point of view.
I feel so lonely, I’m waiting for you,
But nothing ever happens – and I wonder.

I wonder how, I wonder why yesterday you told me
‘Bout the blue blue sky and all that I can see is just
A yellow lemon tree. I’m turning my head up and down
I’m turning, turning, turning, turning, turning around.
And all that I can see is just another lemon tree.

Sing: dah…

I’m sitting here, I miss the power, I’d like to go out,
Taking a shower, but there’s a heavy cloud inside my head.
I feel so tired, put myself into bed, where nothing ever
Happens – and I wonder.

Isolation – is not the good for me.
Isolation – I don’t want to sit on a lemon tree.
I’m steppin’ around in a desert of joy. Baby anyhow I’ll get
Another toy and everything will happen – and you’ll wonder.

I wonder how, I wonder why yesterday you told me
‘Bout the blue blue sky and all that I can see is just
Another lemon tree. I’m turning my head up and down
I’m turning, turning, turning, turning, turning around
And all that I can see is just a yellow lemon tree.

And I wonder, wonder
I wonder how, I wonder why yesterday you told me
‘Bout the blue blue sky and all that I can see
And all that I can see
And all that I can see is just a yellow lemon tree.

Funny isn’t it? So what has happened a year on after Brexit was declared through a referendum? I wondered as when I returned from mainland Europe, a border officer asked me if I lived here, to which I confirmed and told him for at least another year. He laughed and we got talking about Brexit (to be fair it was close to midnight and not many customers). He was adamant Brexit would happen and it would be good for the UK. Of course, I had to argue the other way (not that Brexit won’t happen but that the UK will feel the positive impact). We did agree on one thing. He is not going to be made redundant anytime soon (Lots of Migrants in Calais waiting for that day).

  1. Theresa May failed election shows poor leadership going into the most important negotiation of the UK History
  2. Living standards hugely under pressure
  3. Pound falling sharpely
  4. EU skilled labour exiting
  5. House prices growth have halved

Failed gerneral election

The general election result has plunged Britain into political chaos just 10 days before the government was due to begin the all-important Brexit negotiations. Mrs May  teamed up with Northern Ireland’s Democratic Unionist Party (DUP), which narrowly gave her the numbers she needs to pass legislation in the Commons, but it’s clear a significant period of political instability lies ahead. The split within the Conservative camp is greater than an Oak Tree.

It is hilarious to see Boris Johnson laying down his vision ahead of his boss. The power struggle going on currently is mismerising. This weekend plenty of dismayed Tory MPs – even some who share Johnson’s views on Brexit – are calling on May to dismiss him, while recognising that she is probably too weak to do so. One former minister said: “It is completely disgraceful. You do not write an article like that without consulting the prime minister and your cabinet colleagues. It is a complete abdication of cabinet responsibility. This is all about Mr Johnson, Mr Johnson, Mr Johnson, not about the interests of government or the country.” Another said that Tory MPs would be writing to the whips demanding that he be sacked as foreign secretary because he was a law unto himself and a liability: “He is deliberately tempting May to sack him but the awful thing is that she is too pathetically weak to do so. So we have a cabinet openly at war on the most important issue of the day and that is what we have to live with.” Scottish Tory leader Ruth Davidson, a long-standing critic of Johnson, tweeted her disapproval pointing out that priorities should have been elsewhere the day after a terror attack in London

Leave Barometer: Negative

Living standards under huge pressure

Living standards still face squeeze as earnings have failed to keep pace with rising inflation.

The good news. The ONS said unemployment in the quarter ending in June was down 57,000 on the previous three months at 1,484,000. The jobless rate fell to a 42-year low of 4.4%. Employment was up by 125,000 at 32.1 million in the three months to June, the highest rate (75.1%) since modern records began in 1971.

The bad news. But despite the additional jobs and the acceleration in earnings growth, living standards remain under pressure because pay has failed to keep pace with inflation, which stood at 2.6% in June. Basically, if you received a pay increase lately, the reality is that you are saving less than a year ago (look at that difference in the graph below)

UK_pay_growth_picks_up_as_unemployment_rate_falls_again_Business_The_Guardian_-_2017-09-17_10.52.56

Leave Barometer: Negative

Currency dropping sharply

Winners from weak Pound

  • UK exporters who will be more competitive.
  • Foreign tourists coming to UK (a little ironic given context of Brexit vote!)
  • Foreign investors who find British assets/housing cheaper.
  • UK firms who earn profits abroad. (e.g. firms who have investments in the US)

Losers from weak Pound

  • Foreign firms exporting to UK (e.g. Irish farmers hit by fall in Sterling)
  • British holidaymakers going abroad will find US and EU more expensive
  • Foreign workers in the UK. Working in the UK is relatively less attractive (could reduce incentive for net migration to the UK)

So has the UK benefitted from a weak pound?

Britain’s trade position with the rest of the world worsened in June as the sharp fall in the value of the pound since the Brexit vote failed to lift sales of UK-made goods abroad.

The trade in goods deficit widened unexpectedly to £12.7bn, from £11.3bn in May, as exports fell by 2.8% but imports rose by 1.6% according to the Office for National Statistics. It was the biggest deficit in nine months and much wider than economists’ forecasts of £11bn.

The figures are the latest sign that a weak pound is failing to boost exports, despite making British goods cheaper abroad. The pound is 13% lower against the dollar than it was on the day of the EU referendum, at $1.2988. It is down 15% against the euro, at €1.1052.

Weaker exports in June were driven by a 7.9% fall to countries outside the EU, while goods exported to EU member states rose by 2.7%.

“The UK is becoming more and not less dependent on the European Union, whatever the result of the referendum last year,” said Edward Hardy, an economist at World First. “The numbers are a firm signal that the continent is still the place to be for selling overseas and making the most of the weaker pound.”

Leave Barometer: Negative

EU skilled labour exiting

More Europeans, especially from the East, have left the uk +36% vs. LY. EU migrants are leaving Britain because of uncertainty over Brexit, slower economic growth and higher prices. The slump in the value of the pound — down 14% since the referendum — and stagnating real wages have made salaries earned in the U.K. worth less when transferred abroad.

There has also been an increase in the number of racist attacks on immigrants in the aftermath of the referendum.

“The slowdown reflects uncertainty about both the current and future position of migrants,” said Douglas McWilliams, president of the Centre for Economics and Business Research

The U.K. government has pledged to bring net migration down to “tens of thousands” of people in the wake of Brexit. Net migration — the number of people coming to the U.K. less the number of those who’ve left — has slumped by roughly 25% to 248,000 in 2016. But businesses and experts have warned that the U.K. economy depends on the steady stream of immigrants and will be hurt if they stop coming. U.K. unemployment is at its lowest level in more than 40 years, and many sectors including hospitality, healthcare, tech and construction, are struggling to find staff.

Leave campaigners will have to be thrilled with this. Afterall this is what they wanted. I can’t help to wonder who is going to fill the gaps.

Leave Barometer: Positive

House prices growth have halved

The lender’s latest house price index showed that property prices were 3.8pc higher in March than in the same month last year, the smallest annual increase since May 2013. This was down from an annual growth of 5.1pc in February and far below the peak of 10pc reached in March 2016. Oh no, homeowners are now poorer than they were pre-Brexit vote!

Two options on the table to keep prices up, stop building new homes to tighten the demand, but then unemployment will go up.

Leave Barometer: Negative

Conclusion

So, not all indicators are as bad as I thought a year ago (predicted all of them apart from unemployment rate), but it takes no genius to take a step back and see that the Brexit decision has put the UK in a worse of situation. And the reality is that it won’t improve any time soon. In fact it will get worse. My father once told me that only imbeciles do not change opinion. Too many imbeciles still left to face the facts.

The UK political landscape is a joke and I hope that Jean-Claude Juncker squeezes those conservative clowns as much as possible. Would I want a hard brexit? No. But would I care if it did, no. Why? Mainland Europe will welcome me and my fellow Europeans (incl. my investments) with open arms. So who is to lose out in the whole brexit situation? 49% of those that voted to remain and 51% of those that voted to leave.

Benoit Mercier

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Keep calm and Carry on…

Keep Calm and Carry On was a motivational poster produced by the British government in 1939 in preparation for the Second World War. The poster was intended to raise the morale of the British public, threatened with widely predicted mass air attacks on major cities.

Last Friday the UK population decided to exit Europe. A sad day. Not because of the economical repercussions, not because of the immigration debate but simply because, we now have a broken European continent, in which a poster like the one above could make a re-appearance. The basis of Europe was to avoid wars. Now there is a greater probability tomorrow than there was yesterday.

Most Leave campaigners, some of my friends, were jubilant and shouting “we have our country back”. My question to them all is at what cost. Are they prepared for years of austerity? (strongly dismissed by my Leave friends). The pound will be close to parity, oil prices are going up, inflation is around the corner and jobs will be cut. The other main argument is Europe is costing us too much money. Of course it is. The UK like France and Germany high the high earners and therefore must contribute accordingly. Now most Leave campaigners I have met or heard say that it is not fair. Well my response is always the same. You live in a society. Do the 1% of UK citizens earning more than a £100k are happy to have to pay more tax than the others for no added value benefits? of course not. But I don’t hear 99% of the population saying it is not fair. So why at a macro level point of view it is suddenly unfair for the UK to contribute more than lets say Poland?

My belief is that UK citizens should never have been allowed to vote on such a crucial matter (but one would argue that this referendum is not legally binding). This is why you have politicians, that understand better the political and economical repercussions (would a CEO ask his employees their opinion when defining a strategy?). This vote should go to the house of Commons. People have been sold a dummy and Boris is getting what he wants, the PM hot seat. It is the same man that wrote just two years ago that the EU had ‘helped to deliver a period of peace and prosperity for its people’. Smooth Boris!

As a pro European I woke up a minority but I can’t help believe that in 2 years time, I may just be in a majority, unless of course, if I will be shipped backed to Britanny in a Farage’s container. By the way, just a note on immigration, there are more Irish living in the UK  674,786 people in England (1.4 per cent of the population) than any other European countries (https://fullfact.org/europe/immigration-and-eu-referendum/). Really looking forward to the immigration policies. On a more serious note, no one can fully predict the future, but was the risk worth taking? Maybe we should have done a decision tree.

Finally, if there is some positive out of it, it is that I hope it will shake other European countries and lead to a review on how Europe is being ruled. There are clearly a lot of issues to tackle and some excellent points raised by the Leave campaigners. I just hope that Brussels won’t dismiss the issues.

Benoit Mercier

Hot topic: Understanding Brexit

brexit.jpg

As a European and firm believer in its benefits, I thought I would try objectively to represents both camps arguments and conclude by giving my personal opinion. However, I will start by explaining what the Brexit is about as I feel very few people understand and/or realise the importance of this referendum. The BBC website did an excellent piece on presenting what is happening and why.

What is the Brexit?

What is happening?

A referendum is being held on Thursday, 23 June 2016 to decide whether Britain should leave or remain in the European Union.

What is happening?

A referendum is basically a vote in which everyone (or nearly everyone) of voting age can take part, normally giving a “Yes” or “No” answer to a question. Whichever side gets more than half of all votes cast is considered to have won.

Why is a referendum being held?

Prime Minister David Cameron promised to hold one if he won the 2015 general election, in response to growing calls from his own Conservative MPs and the UK Independence Party (UKIP), who argued that Britain had not had a say since 1975, when it voted to stay in the EU in a referendum. The EU has changed a lot since then, gaining more control over our daily lives, they argued. Mr Cameron said: “It is time for the British people to have their say. It is time to settle this European question in British politics.”

What is the European Union?

The European Union – often known as the EU – is an economic and political partnership involving 28 European countries. It began after World War Two to foster economic co-operation, with the idea that countries which trade together are more likely to avoid going to war with each other. It has since grown to become a “single market” allowing goods and people to move around, basically as if the member states were one country. It has its own currency, the euro, which is used by 19 of the member countries, its own parliament and it now sets rules in a wide range of areas – including on the environment, transport, consumer rights and even things like mobile phone charges. However, the BBC miss the most important point. The EU was created in order to avoid a third World War and ensure that state members would not fight with each other.

What will the referendum question be?

“Should the United Kingdom remain a member of the European Union or leave the European Union?”

What does Brexit mean?

It is a word that has become used as a shorthand way of saying the UK leaving the EU – merging the words Britain and exit to get Brexit, in a same way as a Greek exit from the EU was dubbed Grexit in the past.

Who will be able to vote?

British, Irish and Commonwealth citizens over 18 who are resident in the UK, along with UK nationals living abroad who have been on the electoral register in the UK in the past 15 years. Members of the House of Lords and Commonwealth citizens in Gibraltar will also be eligible, unlike in a general election. Citizens from EU countries – apart from Ireland, Malta and Cyprus – will not get a vote.

Pros and cons of Britain voting to leave Europe

Membership fee 

For: Leaving the EU would result in an immediate cost saving, as the country would no longer contribute to the EU budget. Last year, Britain paid in £13bn, but it also received £4.5bn worth of spending, “so the UK’s net contribution was £8.5bn”. That’s about 7 per cent of what the Government spends on the NHS each year.

Against: According to Martin Wolf, a well respected economist from the Times, “the net fiscal cost is a mere 0.5 per cent of gross domestic product. Moreover, this could be regained in full only if the UK abandoned altogether its preferential access to the EU market. The UK is also one of the least regulated high-income economies. Its recent labour market performance demonstrates its continuing (and remarkable) flexibility. A study from the Centre for European Policy Studies adds that only “6.8 per cent of UK primary legislation and 14.1 per cent of UK secondary legislation” was passed in order to implement EU law.

Trade 

For: Ukip leader Nigel Farage believes Britain could follow the lead of Norway, which has access to the single market but is not bound by EU laws on areas such as agriculture, justice and home affairs. Leading Brexit campaigner Boris Johnson, meanwhile, has proposed adopting a Canada-style trade arrangement. “I think we can strike a deal as the Canadians have done based on trade and getting rid of tariffs” and have a “very, very bright future”, he said. The idea was quickly dismissed by the PM, who said it would mean “years of painful negotiations and a poorer deal than we have today”. Eurosceptics argue that the vast majority of small and medium sized firms do not trade with the EU but are restricted by a huge regulatory burden imposed from abroad.

Against: The EU is a single market in which no tariffs are imposed on imports and exports between member states. “More than 50 per cent of our exports go to EU countries”. Britain also benefits from trade deals between the EU and other world powers. “The EU is currently negotiating with the US to create the world’s biggest free trade area,” says the BBC, “something that will be highly beneficial to British business.” Britain risks losing some of that negotiating power by leaving the EU, but it would be free to establish its own trade agreements. Moreover, “If Britain were to join the Norwegian club,” says The Economist, “it would remain bound by virtually all EU regulations, including the working-time directive and almost everything dreamed up in Brussels in future.” And it would no longer have any influence on what those regulations said. Martin Wolf states that the argument that the UK should leave because a eurozone break-up would damage the UK economy is simply not valid. “If the eurozone broke up in a disorderly fashion, the damage to its closest partners might be substantial. Yet the EU will remain the UK’s biggest trading partner indefinitely. Thus the UK would be damaged by a eurozone break-up, whether in the EU or not. Arguing that leaving would shield the UK against such a disaster would be like arguing Canada should leave the North American Free Trade Agreement, to avoid a US financial crisis. It makes no sense”.

 

A study by the think-tank Open Europe, which wants to see the EU radically reformed, found that the worst-case “Brexit” scenario is that the UK economy loses 2.2 per cent of its total GDP by 2030 (by comparison, the recession of 2008-09 knocked about 6 per cent off UK GDP). However, it says that GDP could rise by 1.6 per cent if the UK was able to negotiate a free trade deal with Europe – ie to maintain the current trade set-up – and pursued “very ambitious deregulation”. Whether other EU countries would offer such generous terms is one of the big unknowns of the debate. Pro-exit campaigners argue that it would be in the interests of other European countries to re-establish free trade, but their opponents suggest that the EU will want to make life hard for Britain in order to discourage further breakaways.

Investment

Inward investment is likely to slow in the run-up to the vote, due to the uncertainty of the outcome and its consequences: that’s what happened in before the Scottish independence referendum in 2014. It is most likely that the pound/euro will be on parity £1 = 1 euro

For: Whilst Brexit campaigners suggest that, free from EU rules a regulations, Britain could reinvent itself as a Singapore-style supercharged economy. Barclays, has put forward a worst-case scenario that might benefit the Outers. It says the departure of one of the EU’s most powerful economies would hit its finances and boost populist anti-EU movements in other countries. This would open a “Pandora’s box”, says the Daily Telegraph, which could lead to the “collapse of the European project”. The UK would then be seen as a safe haven from those risks, attracting investors, boosting the pound and reducing the risk that Scotland would “leave the relative safety of the UK for an increasingly uncertain EU”.

Against: In the longer term, there are diverging views: pro-Europeans think the UK’s status as one of the world’s biggest financial centres will be diminished if it is no longer seen as a gateway to the EU for the likes of US banks. Fears that car-makers could scale back or even end production in the UK vehicles could no longer be exported tax-free to Europe were underlined by BMW’s decision to remind its UK employees at Rolls-Royce and Mini of the “significant benefit” EU membership confers. Likewise, Business for New Europe says tax revenues would drop if companies that do large amounts of business with Europe – particularly banks – moved their headquarters back into the EU, meaning many job losses in the UK.

Immigration

Under EU law, Britain cannot prevent anyone from another member state coming to live in the country – while Britons benefit from an equivalent right to live and work anywhere else in the EU. The result has been a huge increase in immigration into Britain, particularly from eastern and southern Europe.

According to the Office for National Statistics, there are 942,000 eastern Europeans, Romanians and Bulgarians working in the UK, along with 791,000 western Europeans – and 2.93m workers from outside the EU. China and India are the biggest source of foreign workers in the UK.

For: Farage says immigration should be cut dramatically, and the leaving the EU is the only way to “regain control of our borders”. Other pro-Brexit campaigners would not necessarily reduce immigration, but say that it should be up to the British Government to set the rules.

Against: while the recent pace of immigration has led to some difficulties with housing and service provision, the net effect has been overwhelmingly positive

David Cameron says that concessions he won during the renegotiation of Britain’s EU membership will reduce immigration as new arrivals will receive a lower rate of child benefit. 

Jobs

The effect of leaving the EU on British jobs depends on a complex interplay of the factors above: trade, investment and immigration.

For: A drop in immigration would, all else being equal, mean more jobs for the people who remained with higher wages

Against: Pro-EU campaigners have suggested that three million jobs could be lost if Britain goes it alone.  Labour shortages could also hold back the economy, reducing its potential for growth. Stuart Rose, former Marks & Spencer chief executive and a prominent pro-EU campaigner, conceded recently that wages may rise if Britain leaves – which would be good for workers, but less so for their employers. Writing for the London School of Economics, Professor Adrian Favell says limiting freedom of movement would deter the “brightest and the best” of the continent from coming to Britain and reduce the pool of candidates employers can choose from. Free movement of people across the EU also opens up job opportunities for British workers seeking to work elsewhere in Europe.

 

Britain’s place in the world

For: leaving the EU will allow Britain to re-establish itself as a truly independent nation with connections to the rest of the world.

Against: Brexit would result in the country giving up its influence in Europe, turning back the clock and retreating from the global power networks of the 21st century. Brexit would bring some clear-cut advantages, says The Economist. The UK “would regain control over fishing rights around its coast”, for example. But it concludes that the most likely outcome is that Britain would find itself “a scratchy outsider with somewhat limited access to the single market, almost no influence and few friends”. Britain would remain a member of Nato and the UN, but it may be regarded as a less useful partner by its key ally, the US. The American government fears that the “EU referendum is a dangerous gamble that could unravel with disastrous consequences for the entire continent”, says The Guardian.

Security

For: Work and Pensions Secretary Iain Duncan Smith, who has come out in favour of Brexit, says we are leaving the “door open” to terrorist attacks by remaining in the EU. “This open border does not allow us to check and control people,” he says. Colonel Richard Kemp, writing in The Times, says these “critical bilateral relationships” would persist regardless of membership, and that it is “absurd” to suggest that the EU would put its own citizens, or the UK’s, at greater risk by reducing cooperation in the event of Brexit. “By leaving, we will again be able to determine who does and does not enter the UK,” says Kemp, a former head of the international terrorism team at the Cabinet Office. “Failure to do so significantly increases the terrorist threat here, endangers our people and is a betrayal of this country.

Against: However, a dozen senior military figures, including former chiefs of defence staff Lord Bramall and Jock Stirrup, say the opposite. In a letter released by No 10, they argue that the EU is an “increasingly important pillar of our security”, especially at a time of instability in the Middle East and in the face of “resurgent Russian nationalism and aggression”. Defence Secretary Michael Fallon has also said the UK benefits from being part Europe, as well as Nato and the United Nations. “It is through the EU that you exchange criminal records and passenger records and work together on counter-terrorism,” he said. “We need the collective weight of the EU when you are dealing with Russian aggression or terrorism.”

My views

I must say that I am very intrigued to understand what Brits will vote in few days time. I feel that exiting would be a step backwards and a risk that I wouldn’t want my son to pay for in the future. We have been very fortunate that since the second world war we have not had any conflict in Europe. If the UK left Europe it could be the beginning of the end for the EU and who is to say that a third world war would not be on our door step. Many of you have not known these dark times but you have all read your history books. Therefore, lets confine these moments to the books and let’s make sure that we do not write any new chapters.

My views on Trade

I work for a Fashion British retailer. British fashion is highly trendy in Europe and trade is growing fast. Some people believe that the Brexit would have no or little impact. I beg to differ. In the short term, I believe that it will be positive, with a most likely scenario of £/euro parity. For European citizens to buy on my website will have never been that cheap. However, the cost of sending that product to Europe will be more expensive and longer due to the potential reintroduction of tariffs.These WTO tariffs range from 32 per cent on wine, to 4.1 per cent on liquefied natural gas, with items like cars (9.8 per cent) and wheat products (12.8 per cent). The UK would also need to strike deals with other countries to leviate these barriers. Needless to say that it will be a lengthy and costly operation. It is also worth to assume that as Damian Chalmers, professor of European Union law at the London School of Economics, says the bigger threat to the UK exports would not be necessarily from WTO tariffs, but other EU states imposing new regulations and other “non-tariff barriers” to keep UK services out.

My views on investment

Simple, not appealing anymore. London is the financial capital of Europe. It would lose its status and most businesses would most likely exit their investment centres. Although I will cover this in the job section, people losing their jobs will be huge.

My views on jobs

JOB LOSSES overall, with some opportunities in few sectors. This is linked to the immigration policy that would see thousands of European migrants exiting the country. Good news? Not so sure. Yes Brits would find more opportunities but businesses would have to train and pay a lot higher wages than now. Why? Simple. It is the demand and supply concept. You will have more jobs to fill than active workers. Therefore, each employer will have to raise the wages to attract and/or retain the best workers. This will lead to a price inflation and ultimately the consumer will pay that price. We know that in inflation cycles, people spend less and save more, which is not what you need in order to stimulate the economy. The other part is that although on paper you would have more jobs to fill, part of the demand will go away with the EU migrants, therefore businesses will close down creating more unemployment.

Virgin Money chief executive Jayne-Anne Gadhia says a Brexit could cause UK job losses and eventually cause mortgage rate increases. Speaking to the Telegraph, Gadhia says the UK voting to leave the EU would lead to a spiral of inflation, job losses and interest rate hikes that would cause mortgages, and other financial services, to become more expensive.

My views on the housing market

Not covered by many, but I foresee a lot of social issues when it comes to the housing market. House prices in England are stupid. Why? again it is the simple rule of demand and supply. If many EU migrants leave the country, it will mean more homes become empty and thus available but 2 main issues persist for me:

  1. People paid high prices for their house and mortgages and the value of their property will fall. In fact, the interest rates are likely to go up creating a real bottle neck and putting at a stand still the housing market.
  2. Construction will stop with hundred of jobs with it.

I feel that this is a bleak future afor mortgage owners at the moment. However, if like me you are renting, you should look out for bargains as people will have to sell on the cheap.

My views on immigration

This is the topic that most pro exit center their arguments against. My view is simple once again. Immigration is good for the economy, for the culture and the development of a nation. However, I will agree that the EU is too large and should have been restricted and better policed. Some eastern European members should be excluded and other bad pupils like Greece should have been kicked out. I really feel that it is a false debate. The UK has always had borders, unlike other member states, and therefore is able to restrict who comes in and out. If there was a Brexit, what would you do with all the legal immigrants? There is no plan that is my point. Do you think state members such as France would police immigration in the same way? You can bet that the refugees in Calais would soon be in Dover. In fact some measures have already been introduced. Non-EU migrants who have spent more than five years working in the country will be required to earn £35,000 per year or else face deportation

What about terrorism? Surely it is better to work all together than in silo.

So yes to regulation but no to suppression, the economical impact would be damaging.

Conclusion

I will conclude by saying that like any relationship you will have some good and bad times. I firmly believe that the relationship that the UK entertains with the EU offers better outcomes than negatives, and you should not divorce until you have been able to work through your issues (immigration being for Brexit voters the main one). It is quite telling that the Queen (monarch) and the conservative leader David Cameron of all people are in favour of staying. If Britain did exit, I am sure that in the short term, consequences would be little but in the long term would lose out big time. But it is worth remembering that in constitutional terms, the referendum is “advisory”, not “binding”, meaning the Government can choose how to respond, and I am pretty sure they would over rule the nation’s decision.

From my point of view. Stay in the EU, renegotiate few terms and see where it takes us. After all, an ideal world doesn’t exist.

Happy voting

Benoit Mercier

 

Will oil cause the next recession?

That was the debate I was having with few friends couple of days ago and I must say that algthough we did not all agreed I am pretty convinced that it will. In fact, a member of my family is out of work at the moment because he use to transport oil between South America as a middleman and his services are no longer required creating the first bankrupcy of the year that I know of. Hard to take but why pay someone in the middle when prices are so low by going direct. More margins are being made at the moment as very few companies share the benefits with the consumer. Only recently have supermarkets and airlines have started lowering their prices. Why? Officially because they bought their stock of petrol at a higher price as they secure deals many months ahead. The reality…PROFIT. Would I blame them, of course not.
Many forecasters believe consumers will spend the windfall, and thus boost the economy. But almost all of the savings from lower pump prices so far have been used to rebuild household assets and reduce debt. Consumers tend to increase their savings in tough times; they’ve been doing so during the six-year recovery.

Lower oil prices, however, could come with a downside. As they work their way through the system, deflation could follow. Already, 10 of the 34 largest economies in the world have seen year-over-year declines in consumer prices. The risk is that deflationary expectations could follow, encouraging consumers to withhold purchases in anticipation of even lower prices. If that is the case, excess capacity and inventory would build up rapidly and large quantities forcing price down.

Do you agree?

Benoit Mercier

Global and UK economy outlook 2016

As noted on the BBC’s website, The World Bank has warned of new threats to efforts to reduce poverty in the developing world and The Bank forecasts only a modest increase in growth.

The World Bank does think that global economic growth will pick up this year. If I were a betting man, I would doubt it. Why?

  1. We are still recovering from the Great Recession, which followed the international financial crisis and this is because…
  2. …the US. The Federal Reserve finally raised its main interest rate target from the level of practically zero it has had since the end of 2008. It’s likely to lead to higher borrowing costs, and lower currencies, because money will be moved to the US to benefit from the rising interest rates there. That in turn will make it more expensive to repay loans in dollars. And the issue is that the dollar is the world currency, 75% of world transactions, ouch an expensive prediction!
  3. …China’s slowdown and uncertainty. China was seen as our saviour and an economy that was tipped to overtake the US. Has it happened? To some extent it has moved in that direction, but in a country that likes to regulate its markets, the recent slowdown, which began around the start of the current decade, demonstrates to me that more volatility is to be expected. Tthe question has been: will it be a smooth transition or not, a hard or soft landing? So far, no crisis, though there have been some sharp stock market falls in China. There were several weeks of volatility in the middle of 2015 and trading for this year got off to an inauspicious start, with a fall of 7% in Shanghai and trading suspended.
  4. The oil price. Last time that the oil prices were low, we know where it took us…The Great Recession. The key question is when will it spike back up again and pinch consumers spending!
  5. Emerging markets. The IMF predicts that growth for emerging and developing economies will pick up this year, from 4.0% to 4.5%. Not enough to boost the world economies!

In a nutshell my glass is more half empty than half full, let’s hope I am wrong!

Benoit Mercier

 

Colombian macroeconomy

I take the opportunity to be in this incredible country that is Colombia to analyse its macroeconomy and its potential

1. Overview

At the end of the 1990’s, Colombian economy suffered the most serious recession in its last fifty years. It was so deep that output decreased about 5% in 1999. In addition, the unemployment rate started to rise consistently from 7.5% in the 1980’s and reached 20% in 2000. This increase in unemployment was accompanied by a gradual reduction in inflation from 41.65% in 1992 to 9.75% in 2000. Past Governments have worked hard to tackle this issue and reverse the macroeconomic trend by implementing various policies.

Current overview

In 2014, according to the World Bank, Colombia is now the 31st biggest economy in the world with $378.1bn of GDP. Colombia is part of the CIVETS, which regroups the six favoured emerging markets behind BRIC countries, which demonstrates the economic potential of Colombia.

On June 15th 2014, Colombian voters handed President Juan Manuel Santos a mandate to continue his efforts to negotiate a peace deal with leftist guerrillas (FARC) and end more than a half-century of internal conflict.

Under an effective countercyclical framework, Colombia’s growth was 4.1% in 2013 and is expected to reach 4.5% in 2014. Growth in 2013 was above the South American regional average which was 3.7%, and although there remains fiscal pressures from the slower economic activity and labour unrests, the government remains committed to fiscal stability. To date, the Colombian Government has managed to stabilise the country’s inflation at 2.79% and the current unemployment rate is at 8.80%.

The monetary policy framework in Colombia is based on an extended Inflation Targeting strategy that aims at maintaining a low and stable inflation rate, stabilizing output around its natural level and contributing to the preservation of financial stability. A key issue regarding the exchange rate in the monetary policy framework in Colombia is the set of conditions that allow the exchange rate to work as a shock absorber. As in other open emerging economies, in Colombia the bulk of shocks are real, not nominal. Thus, a flexible exchange rate regime is appropriate to stabilize the economy in the face of those shocks, especially in the context of rigid formal labour markets. Importantly, a flexible exchange rate regime is necessary for a countercyclical monetary policy response to the shocks. Therefore, ensuring the conditions for a flexible exchange rate is crucial.

The peso has lost 15% of its value against the US dollar since early 2013, when the government took steps to weaken the currency to protect the export sector. The Central Government fiscal deficit is almost unchanged at 2.3% of GDP, below the 2.4% expected result of 2013, and in line with the fiscal rule. Finally The overall public debt was reduced from 32.6% in 2012 to 32.3% of GDP in 2013.

  1. Long strengths and weaknesses

The country continues to exhibit very positive macroeconomic conditions, even though there are some long-terms challenges that need tackling.

Strengths

  • Strong macroeconomics track record through a well-balanced public budget. The deficit reduction policy was to alter the tax structure by reducing the corporate tax rate to 30% of revenues, eliminating double taxation (tax deductions related to inflation adjustments and increasing personal income taxes). As a result, inflation is under control at around 3%.
  • Strong availability of its factors of productionso   Land –26thlargest nation with abundance of natural resources. Colombia is well placed to tap into new sources of growth provided by natural capital (e.g. Petroleum, Gold, Natural Gas and Emeralds).

o   Labour – overall strong and young availability of workforce with high levels of education. Strategy to fight unemployment established in 2010 was based on three key reforms: (1) in depth reform to the education system; (2) implementation of a social safety net to help the most vulnerable strata of population; (3) reform of the labour code aimed to: (i) reduce and flex non-wage costs; (ii) introduce mechanisms to help make wages more flexible; and (iii) provide a wider variety of hiring modalities and ways to organize the time within the firms[1]. As a result, unemployment rate has been declining from 17.87% in 2002 to 9.19% in 2014 and it is forecasted to reach 7% in the next 5 years.

o   Capital – accumulation of capital, the investment rate has been increasing gradually since 2000 and has now reached a high record above 30% of GDP.

o   Enterprise – 20.6% new businesses launched within the last three years, compared to an average of 11.8% in the Andean economic region. Achieved through education and tax relief measures.

o   Financial services are relatively sophisticated with a considerable market size, developed under a model of specialized ‘vehicles’ subject to severe restrictions on permissible activities, especially for deposit-taking institutions.

Weaknesses

  • Negative dominance of natural resources related FDI, to the detriment of the manufacturing and service sectors where it has actually been declining in absolute terms in the wake of the recent global financial crisis. There has been a lot of FDIs in minerals but specifically with no manufacturing value added.
  • Dutch disease. Too high dependence on commodity exports, especially oil. The level of diversification of the Colombian economy is relatively low and the country is dependent on the export of a narrow range of commodities, which makes the country vulnerable to commodity price fluctuations.
  • Political and social instability (FARCS conflict) will 1) cost a lot of money; 2) discourage external investments. To raise funds, Colombia needs to borrow from international markets and raise taxes, which will impact negatively savings and consumption levels.
  • Colombia shows a strong gap in improving the productivity of human capital, generating poverty traps and limits the availability of skilled labor force.
  • Ambitious transportation infrastructure plan, worth $25bn investment to be completed in the next 5 years. It will add competitiveness:
    • By increasing the investment grade from 1% of GDP to 3% of GDP and keep it there for at least 10 years.
    • By increasing employment across industries that feed the construction sector
    • By doubling speed of transportation (trucks will go twice faster), the cost of operations will be cut by half.

Increase of FDIs. Colombia has one of the largest, portfolio of projects in the pipeline with private sector investors and are a very stable country for private investors

  1. Analysis of Colombia’s trade position and its comparative advantage

Trade position

Colombia recorded a trade surplus of 0.06 USD Billion in May of 2014. Balance of Trade in Colombia averaged -0.07 USD Billion from 1980 until 2014, reaching an all-time high of 0.81 USD Billion in December of 2011 and a record low of -1.15 USD Billion in April of 2014.

The trade of balance has been much more volatile since 2007, which coincides when the NAFTA agreement was signed between the US and Colombia.

The Country’s leading markets for exports were U.S. 36.6 %, Spain 4.8%, China 5.5%. Its leading suppliers were U.S. 24.2%, China 16.3%, Mexico 10.9%, and Brazil 4.8%. Today there are 10 agreements in course including agreements with the European Union, Canada, Panama, Korea, Israel and Costa Rica and initial conversations have started with Japan.

Colombia exports

In the past 5 years, exports have on average gradually increased. However, exports amounted to USD 4.3 billion in April of 2014, compared with last year’s USD 4.9 billion (-13.1% yoy). This drop is due to a fall in manufacturing shipments (-19.8%) and lower sales were recorded to the United States (-41.4%), India (-43%), Venezuela (-27.2%) and Ecuador (23.5%). Export growth remains modest and below the import pace due to supply problems, particularly in the mining sector.

Colombia imports

Like the exports, imports have gradually increased in the last 5 years. Imports increased 5.6% yoy to USD 5.5 billion in April of 2014, against USD 5.2 billion one year earlier. Higher imports were made from the United States (+12.3%) mostly fuels, mineral oils and products and cereals; imports of aeronautical from France increased 170.9% and those of electrical recording, iron and steel from China rose 13.6%. Both public spending and household consumption are gaining momentum, fuelling import demand.

Impact of the trade agreements

The positive impact of the NAFTA and other trade agreements are:

  • Opened new markets for its exports (+47% increase in just three years)
  • It has expanded the variety of goods available to businesses and consumers meaning a reduction in the country’s vulnerability to the volatility of commodity prices.
  • It has increased competition and thereby reducing the extent of monopolistic pricing and the inefficiency that results from it, and pushing up the rate of productivity growth.
  • Increased FDI from on average USD 200m prior to 2007 to USD 3,900m in 2014. Laws and decrees were created to remove barriers of trade.
  • With the entry of new participants in the Colombian market and entry of domestic firms in the U.S., it is expected that Colombian firms increase their investment in R&D in order to position their products in the national and international markets, which will benefit domestic consumers who will have a greater variety and quality of products available.

The negative impact of these trade agreements are:

  • Local companies are not ready yet to go out to the market due to a lack of knowledge and skills and a lack of exposure to inexperienced industries. Not yet experienced economies of scale and will not be able to withstand foreign competition.
  • Not all industries will have benefited from NAFTA (e.g. small agricultural producers are competing against a flood of cheap imports, which means prices and income dropped).
  • These agreements make Colombia become much more dependent and vulnerable to these partners’ economies, especially the USA.
  • Drug cartels benefit from NAFTA
  • Colombia’s economy still has competitive disadvantages to maximize the expansion of Colombian’s export markets. The geography of the country, with three major mountain ranges presents difficulties in transporting goods from the Midwest to the coast and their subsequent export

Colombia’s comparative advantages

I firmly believe that Colombia’s existing and well established comparative advantages are:

  • Its location (adjacent to two Oceans) and its natural resources. Colombia has a wealth hardly comparable to any other country in the world. This biodiversity allowed the country to establish itself as a very important supplier of raw materials worldwide because of the relative abundance of resources that it has.
  • Its workforce, with a large pool of qualified professionals with great prospect with scope for improvement.
  • Its sound economy. Currently, Colombia has established itself as one of the main destinations of foreign direct investment: high rates of growth and low inflation that has been submitted, the tax reforms implemented and it has shown outstanding performance among financial turbulence, have become one of the most promising emerging economies and stronger macroeconomic fundamentals.
  • Colombia is looking to capitalise on new industries (e.g. tourism).
  1. Impact on the macroeconomy if there is a sustained fall in the real exchange rate

If there was a sustained depreciation in the real exchange rate it would impact mainly two aspects of Colombia’s macroeconomy:

  • Balance of trade through both imports and exports – it would work in Colombia’s short-term favour as it would grow exports and contract imports, thus reducing the deficit
  • Imports – increases the price of imports, such as machinery (#1 import) and reduces the foreign price of a country’s exports. If consumers (e.g. US) buy fewer imports, while exports grow, AD will rise – and there may be a multiplier effect on the level of demand and output. The potential drawback for Colombia is that in order to produce more, therefore export, it needs machineries.
  • Exports – exporting countries would find it cheaper to buy products from Colombia. However, the risk for Colombia would be a rise in inflation.
  • Higher demand from a fiscal stimulus e.g. lower direct or indirect taxes or higher government spending. If direct taxes are reduced, consumers have more disposable income causing demand to rise. Higher government spending and increased borrowing creates extra demand.
  • Also, monetary stimulus to the economy: A fall in interest rates may stimulate too much demand.
  • Debt is denominated in US Dollars if the Peso falls then it means that they would need more Pesos for a given Dollar.
  1. Impact of the financial crisis on Colombia’s economy

The current global financial and economic crisis is the most serious threat that the world has faced in over half a century. It is worth considering that Colombia experienced the worst recession in its history in 1999, a crisis that originated in the mortgage and financial sector. As a result a number of macro-prudential measures were taken early 2000, including a strengthening of financial regulation, which was essential to avoid a contagion through the financial channel in the global crisis of 2008. Thus, the effects of the crisis were short-term and the country quickly regained the path of economic growth.

Colombian economy was not isolated from the events of the global economy. GDP growth for 2008-1Q revealed the first contraction in four years. It is rather difficult to establish if this change in the trend was a consequence of the international crisis, but from that moment on the overall economic growth started its slowdown. By 2009-Q1 the adverse impacts of the crisis had become more evident, especially in the labour market and poverty reduction effectiveness. According to the Colombian Central Bank most of the slowdown in the economy was due to internal and regional factors, rather than the international crisis. Growth rate decreased from a maximum of 6.9% in 2007 to a minimum of 1.5% in 2009, as a consequence of the poor results in the areas of exports, financial markets, and remittances. One of the main impacts of the slower growth rates was the increased unemployment rates.

As in many other developing countries, policy response in Colombia has limited to some sort of counter-cyclical measures, mainly related to interest rates management, prioritization of already planned government expending on infrastructure, and precautionary securing of public debt financing. Measures include the undoing of recent credit tightening by the Central Bank. From April 2006 to the beginning of the second semester of 2008, the Central Bank increased interest rates from 6% to 10%, in the face of increased governmental expending, high foreign capital inflows, and an expansionary credit market. To try to smooth the impact of the crisis, since the late 2008 and during 2009, the Central Bank decreased the interest rate by 650 basis points, leading to a 3.5% interest rate, the lowest in recent Colombian history, helping grow consumption. Also, the Central Bank dismantled the requirement for commercial banks to marginally increase the amount of deposits they have to keep from lending to the public and the requirement for borrowers in the international market to deposit in the Central Bank a share of the amounts borrowed. The central government took measures to face the likely decrease in government revenue. It obtained Congress approval to increase the fiscal deficit by 0.6% of GDP, as well as to postpone expending in about the same amount. Furthermore, a FCL (worth US$11m) was contracted in May 2009 with the IMF to secure coverage against adverse balance of payments shocks and for increasing the scope for countercyclical measures.

All experts are in agreement that the economy has been able to face the global financial crisis thanks to its sound macroeconomics fundamental. In fact in 2009 the country had a positive growth of 1.7%, while the other economies in the region in general and emerging economies registered negative growth. The main transmission channel of the crisis was real, since a decline in growth in the developed world was presented thus affecting external demand for export products of Colombia. This drop in external demand affected the dynamics of Colombia’s exports and by extension the overall economy. However, as mentioned, the Colombian economy quickly regained the path of growth, and in 2010 showed an increase of 4.0% and 6.6% in 2011

  1. Recommendations to improve future long-term growth

In June 2014, Colombia President was re-elected with a campaign around “peace”. It was welcomed by Europe and the US, which have largely been relying on Santos’s image as a moderate to justify their continued relationship with Colombia. Therefore, please find below Colombia’s key objectives by order of priority to sustain and grow Colombia’s macroeconomics.

Peace process

The key success factor to growing the economy is for Colombia to experience a peace process with the Marxist FARC. It will create greater social and economic stability in the medium term. The economy of the country relies on that peace process because:

  • The new transportation infrastructures will inevitably go through FARC territories, and due to the size of the investment cannot risk being blown up.
  • FDI will only increase if the country can show stability as conflict means instability and investors will lose confidence and exit.
  • Tourism is a huge opportunity but like in the financial sector, tourists will only come if they feel in security.
  • Reduce public spending is a key component in the budget. Peace will come with a huge cut in defence budget, which can they be partially be reinvested. Currently Colombia’s military expenditure accounts for 3.3% of GDP.
  • It will slow down the migration of internal population towards the capital city Bogota. Non-skilled people would benefit more to the economy if they were farming than living in favelas around Bogota.

Transportation infrastructures

One of the main bottlenecks faced by the country is poor quality and coverage of transportation infrastructure, which increases transaction costs and transport, thereby reducing the competitiveness of various sectors of the economy, such as industry and trade. According to the World Economic Forum, Colombia is ranked 108 of 144 in infrastructure quality, and less than 15% of the roads are paved. Transport also carries an important social and environmental load, which cannot be neglected. At macroeconomic level, transportation and the mobility it confers are linked to a level of output, employment and income within a national economy. The aim is for transportation to account for 6% of the GDP. The added value and employment effects of transport services usually extend beyond employment and added value generated by that activity; indirect effects are salient. The Government has developed a $ 60bn ambitious plan which aims to reduce this gap by developing infrastructure projects fourth generation (4G), which will be built and will conform more than 8,000km of roads and highways between 2012 and 2020.

Public finances

Colombia has made significant achievements in economic terms in recent years as the reduction of inflation, institutional fiscal framework with strong public finances, reducing poverty and inequality. It is crucial for Colombia to reduce its military expenditure and reinvest it into education and raising national income to develop new sectors (e.g. IT, R&D).

Financial Direct Investments

Capital flows, especially foreign direct investment (FDI), are one of the key components of globalization and international integration of developing economies. Larger inflows of foreign investments are needed for the country to achieve a sustainable high trajectory of economic growth. FDI has an employment creation effect. If more jobs are created it will increase the consumption and savings, therefore increasing GDP. As a consequence, we should consider offering foreign companies a tax relief to install their operations in Colombia as well as employing and training Colombian workers.

Benoit Mercier