Why banks should start to change their Brexit tune
Tim Focas thinks that the anti-Brexit naysayers in the mainstream media are far too negative,especially, when it comes to Britain's economy.
Remember all the Sodom and Gomorrah claims that the UK’s financial sector would go to hell in a hand cart if Britain left the EU with no withdrawal agreement? Yes, that’s a withdrawal agreement, not a “deal” as the mainstream media often incorrectly refer to the terms of exit as.
It seems that it is not just the government that is finally coming to terms with the positives, as opposed to negatives, Brexit will bring. The often much maligned financial services, which accounts for roughly 8% of the UK’s economic output, is just one sector starting to sing a very different tune to the one sung directly after the referendum result. Now critics still point to the falling pound, which hit 1.20 against the dollar earlier this month, as a precursor for the fiscal pain to come. But the reality is that neither a falling currency, or indeed a volatile FTSE, should be seen as an indicator to how UK finance will perform one Britain divorces itself from political Union with Europe.
What does matter, and this is what Banks are starting to realise, is economic fundamentals. Britain, for example, currently has one of the lowest fiscal deficits as percentage of GDP of any country in the world and crucially, 10-year UK gilts are trading at around 60 basis points. Without doing away with fiscal prudence completely, which would be madness given all the efforts to get the balance sheet into some sort of order, the government clearly has some room for maneuver. I’m sure banks, or indeed and business come to that, would say no to an overdue slash in corporation tax.
However, sound government finances is not the only reason why UK finance should be more upbeat. Businesses operating inside the EU are still heavily reliant on bank lending. The problem is that European lenders are struggling. In fact, the European banking sector as a whole has seen second-quarter earnings down 7% year-on-year since the crash. Consistently low interest rates from the European Central Banks (ECB) has been the biggest barrier to profit. And if this wasn’t enough, pressure from the ultra-low rate environment has been compounded by US/China global trade tensions starting to spread. With this outlook for EU lenders unlikely to change anytime soon, European business are going to have little choice but to look to UK finance. After all, firms need global investors with risk appetite to invest, and London’s expertise at financing both listed and private equity is essential to this.
Aside from strong economic fundamentals and banking woes on the continent, could it also be that maybe, just maybe, banks are looking forward to the liberalisation of free trade likely to emerge Brexit. While many UK politicians are yet to fully acknowledge the frustrations of European economic protectionism on and over-regulation, investors understand all too well to their cost. Removing these barriers while still selling to the EU across even small tariffs, as is done by the rest of the world, could usher a new era of lower prices and increased competition. If it comes down to this, it is hard not to see a bright future for Britain’s financial services industry post-Brexit.
Tim Focas is Director of Financial Services at Parliament Street
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