Brexit: The Never-Ending Story: Part 2 – ‘A boy scout is always prepared, isn’t he’?

Brexit: The Never-Ending Story: Part 2 – ‘A boy scout is always prepared, isn’t he’?

Philip Gilbert’s original piece was spot on, and two years later he sees ‘problems’; what you gonna do?
‘Bet you thought you had it all worked out. Bet you thought you knew what I was about. Bet you thought you’d solved all your problems’.1


When I wrote the original ‘Never-Ending Story’ in March 2016, I had no idea how prescient some of my comments regarding the problems created by leaving would be, for example:

Firstly, I asked, ‘how easy will it actually to be to leave the EU’? The consensus was that it would take at least two years, well here we are in October 2018 and we still don’t know as we oscillate between another vote and hard-Brexit. In short, very difficult!

leave voters are people who think more of themselves than they do of their children and grand-children

I then suggested that there might be benefits we wish to keep. These will have to be renegotiated with the UK likely being in a position of weakness after leaving the club! Right, again.

I then asked, ‘will this be the end of the never-ending story’? Right again, there wasn’t an overwhelming majority, people were disappointed, now there is growing support for another referendum!

Finally, I questioned the impact it might have on the political parties. Well, almost immediately after the result David Cameron fell on his sword which was likely being held by Boris, whose own attempt at becoming leader was scuppered by Michael Gove.

Poor Theresa May(be) won and is the fall-guy mandated to deliver a Brexit that is guaranteed to upset a large part of her own party. Labour don’t seem to be sure, and there is the omni-present Nigel Farage waiting in the wings to ride in like Boudica should Brexit not be delivered in the way he and his acolytes want. In summary, the impact has been considerable and is ongoing.

But, on the big question I scored a fat zero, I was genuinely taken aback by the result. However, in defence, predictions regarding the demographics of the voting were spot-on:

  • Under-25s were more than twice as likely to vote Remain (71%) than Leave (29%).
  • Among over-65s the picture is almost the exact opposite, as 64% of over-65s voted to Leave while only 36% voted to Remain.
  • Among the other age groups, voters aged 24 to 49 narrowly opted for Remain (54%) over leave (46%) while 60% of voters between the ages of 50 and 64 went for Leave.

Or as colleague commented afterwards, ‘leave voters are people who think more of themselves than they do of their children and grand-children’. Harsh words, indeed!

One area I didn’t consider was the split along the lines of education:

  • 70% of voters whose educational attainment is only GCSE or lower voted to Leave, while
  • 68% of voters with a university degree voted to Remain in the EU.
  • Those with A levels and no degree were evenly split, 50% to 50%.

Make of this whatever you will. The source for both sets of data is;

So, where are with Brexit and reaching agreement with the EU, or ourselves, for that matter? It seems there are 4 potential options:

  1. Leave with a deal:

The UK and the EU both insist they want as amicable a divorce as possible, with a legal agreement setting out the kind of relationship they will have when the UK is no longer a member of the club.

  1. Leave without a deal

A clean break with the EU. The UK would fall back on its membership of the World Trade Organization (WTO), the global body governing international trade. UK exports to the EU would be subject to the same customs checks and taxes the EU currently imposes on countries like the United States.

  1. Stay in the EU

The UK has formally triggered the mechanism to leave the EU at 23:00 GMT on 29 March 2019. To reverse that at this late stage would mean a huge loss of political face, and probably require a new prime minister, with the backing of voters in a general election.

  1. Hold another referendum

The UK government has ruled this out but there have been many people calling for a fresh vote

So, what does all this uncertainty mean for the economy? Well, perhaps more uncertainty, for example:

‘The Bank’s [Bank of England] latest inflation report has 1.8% growth pencilled in for next year. But Bank officials acknowledge that the biggest of the ‘known unknowns’ — Brexit — could force them to shred their short-term forecasts within a matter of months if the increasing likelihood of a no-deal Brexit materialises.

But the Bank is feeling its way in the dark, balancing its actions on a host of theoretical concepts such as the natural rate of employment (called u*) which the UK economy can sustain without fuelling inflation. That’s been steadily lowered over the past three years as record low unemployment — now 4% — confounds the Bank’.

And, how has the economy performed since the vote to leave?

Overall performance of the UK economy;

it is expected that the UK growth rate in the second quarter will still be stuck close to the bottom of the league table of G7 leading economies.

Research has shown that by the end of Q1 this year the UK economy was C.1.2 per cent smaller than it would have been without the Brexit vote.

The referendum inflicted damage primarily through a hit to household incomes from the 10 per cent dive in sterling, which drove up import prices.

Households are now borrowing more than they save;

In 2017, the savings ratio dropped to 4.1 per cent, its lowest rate for more than 50 years.

As a corollary of this, the household sector has moved into a net financial deficit, borrowing more than it is saving for the first time since 1988.

The danger for the economy is that households are more likely to increase their savings in future, slowing economic activity in the process.

Companies are reluctant to invest;

In the first quarter of 2018, business investment was only 2.3 per cent higher than at the time of the Brexit vote almost two years earlier.

Before the referendum, the Bank of England had expected business investment to have grown more than 13 per cent over the two-year period.

Equities investors mark down UK assets; International investment in UK shares, measured in dollar terms by the FTSE 250 index, which comprises companies that primarily do business within the UK, has done increased by 6%, however the stock markets of other developed economies have risen 28% over the same period.

Unemployment; With the unemployment rate down to 4.2 per cent between March and May — its lowest rate since the mid-1970s — the labour market has strengthened significantly since the EU referendum.


I am not going to make any predictions as to the outcome of Brexit, what will happen when, or perhaps if, we leave the EU, instead let us consider some points that could impact investors:

  • Equities; since a low-point of below 3700 in March 2009 the FTSE 100 index now sits at C.7400, a remarkable bull run.

Now I am known for being bearish on markets, so feel free to disagree. However, we are overdue an end to the current bull market, what better trigger than a messy exit next March? A known unknown, or an unknown unknown.

  • Base Rate is currently 0.75%, well below the historical average, with a knock-on effect for investors seeking yield

Remember whilst the BoE latest inflation report has 1.8% growth pencilled in for next year, bank officials acknowledge that the biggest of the “known unknowns” — Brexit — could force them to shred their short-term forecasts within a matter of months if the increasing likelihood of a no-deal Brexit materialises.

If so, does that keep interest rates at current levels, and more misery for savers?

  • Sterling; on the date of the Brexit vote, £/$ was $1.4877, today it is 1.28. £/€ was 1.30 now it is 1.11.

It was widely said that the weakness of Sterling post-the “leave” vote would stimulate exports as they will be cheaper. Whilst this is true, and the balance of payments deficit did narrow in 2017 to 3.9% of nominal GDP from a record 5.2% in 2016, the lowest number since 2012, the deficit still stands at a not inconsiderable £17.72bn.

However, once we leave the EU, if there is no deal who do we sell to? UK exports to the EU would be subject to the same customs checks and taxes the EU currently imposes on countries like the United States. Hardly helpful.

In addition, household incomes which have already suffered from the fall in Sterling driving up import prices could continue to do so

Brexit represents the great unknown unknown, questions that remain unresolved include:

  • Will we leave?
  • If we do, what form will it take?
  • What will it cost? I avoided going into the cost of divorce here, too painful!
  • What does it mean for the political parties? A large number of Conservative MP’s will feel disenfranchised irrespective of whether we leave or not, and what form the leaving takes. Hardly helpful
  • What happens to the economy?
  • What is the knock-on effect for investors?

To be writing of all these known unknowns over 2-years after the vote, and with only just over 6-month to go before we leave to leave is tragic. In my opinion, this is the single biggest political event in my lifetime and it is simply shambolic. All I hope is I don’t have to write a third episode!

In summary, perhaps a quote from Donald Rumsfeld encapsulates where we are: “There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.” I hope that’s clear?

And, in conclusion over to you, Lord King: ‘a government that cannot take action to prevent some of these catastrophic outcomes [stockpiling food and medicines] illustrates a whole lack of preparation’. It doesn’t tell us anything about whether the policy of staying in the EU is good or bad, it tells us everything about the incompetence of the preparation for it.’

1 Top marks for those of you that recognised the lyric as coming from The Sex Pistols’ ‘Problems’. Quite.





pgPhilip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

Hunting for income in the recession that supposedly never happened

Brexit: The Never-Ending Story : Part 3 – ‘Little Britain’

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