The market continues to make speculative negative bets on the eventual effect of Brexit on the UK economy. We remain optimistic based on Europe and UK mutual beneficial relationships that the end-result will be significantly less severs then a “hard” Brexit. Within a historical context Europe-UK relationship has always had ups-and-downs but interactions have always been a constant. That will not change now. Second, both parties benefit equality from relationship (including bilateral trade), so threats are really meaningless. UK domestic demand has slowed (annual retail sales ex auto fuel rose 2.6% vs. 3.8% exp from 4.1%) after a strong rally post Brexit with many pointing to fears over punitive relocation in the financial sectors and its low productively growth as the culprit. In addition, the rally in the GBP has removed some currency advantage for exporters and lure for foreign buyers.
We agree uncertainty will clearly keep investment subdued yet the outright collapse or relocation of the UKs vital financial sectors is overblown. Also, other key fundamentals remain healthy. UK economy rose faster than many G10 nations, as 1Q GDP expanded 0.3% (pessimist point to the fact that pace was slowest since before referendum) with annual rate at 2.1%. The break down was still optimistic with manufacturing sectors rising 0.5%, construction grew by 0.2% and even the service sector increased by 0.3%. We remain optimists that the final outcome will be “soft” Brexit and effect to the UK economy will be manageable.
By Peter Rosenstreich