A fast move on Brexit is a must in January

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    During the past week, macroeconomic data showed that the British economy, at minimum, is gearing down, and maybe even faster than that.

    The yearly wage growth has dropped from 3.9 to 3.6 percent within a couple of months, though it’s still at a satisfactory absolute level, but the steepness in the drop is a concern.

    But the downwards development in the GDP growth is outspoken, as the yearly growth now touches just 1 percent.

    Again, the steep drop from a growth rate at 2.1 percent just half a year ago is remarkable, and the current growth is actually the lowest over the past 10 years, which hopefully, is a wake-up call for the politicians as well.

    One week earlier, the rating agency Moody’s, changed the outlook for United Kingdom’s current Aa2 credit rating from stable to negative.

    This happens every now and then for countries around the world, though the comments that followed from Moody’s, once again shows that the financial markets have got an additional dimension to take into account.

    Moody’s even uses the expression that “the Brexit periodically paralyses the policymaking”, which I understand, as focus simply drifts away from making reforms and taking care about the economy.

    It may even cause politicians to enter the almost never-ending Brexit infight, instead of doing their normal jobs in the parliament.

    Moody’s says outright that the political direction is less predictable, and it once again reminds investors about the most recent dimension that interferes in investment decisions.

    Exactly that politics plays a more active role, while on the other hand, unpredictable political directions causes uncertainty among businesses and households.

    This harms the whole economy in the classical way, but the different political directions also cause increased volatility in the financial markets.

    It also underlines that countries with an unpredictable political leadership run a risk of becoming less attractive for investors.

    I even chose to interpret the comments from Moody’s, so it includes a slap to the British politicians saying, get the Brexit solved in a hurry, or a downgrade of the credit rating could soon come.

    Many might have been surprised about how well the British economy did after the Brexit ballot in 2016, which I argue was partly due to the tailwind from prior economic reforms undertaken before the ballot.

    One would say that was very lucky – yes, I agree, but it didn’t put any pressure on the politicians to get the Brexit infight solved in a hurry as the economy did fine – but the reality has suddenly started to change.

    Due to the fear of an economic slowdown in United Kingdom, investors globally have reduced their allocations to investments in the United Kingdom from a long time ago, the most conservative investors are completely out.

    For years, it has been outspoken that basically all investors, at minimum, have been underweighting their investment allocation towards Great Britain.

    But in the past months, some investors have already made a minor investment move back towards United Kingdom, with the expectation that the Brexit infight would be solved.

    I believe this emerging trend is already on hold again, as it probably surprised some investors that the political infight ended up in a general election for the parliament on the 12th December.

    This action has also once more, postponed a solution to the Brexit, and there is no doubt that all investors will carefully follow the developments.

    This time though, my expectation to the financial market is that the patience among investors is very limited, i.e., if the British politicians do not find a final Brexit solution in January, then I expect that investors will turn their attention towards something else.

    In case of a continued unsolved Brexit, I also expect the uncertainty to spread further in the British economy, and it will require a lot to turn that trend, so surely, there is a lot at stake on the 12th December and the following month in United Kingdom – after the election, a fast Brexit move is required in January, which so far also is my main scenario.