July 06, 2016
The second Brexit shock
Brexit will keep us busy for the next three years at least. There are still Remainers out there who think this vote can somehow be overturned before it becomes effective. Their hope is that the economy will crumble, and force a nationwide rethink and possibly a wider political realignment. We think this scenario is theoretically possible, but has a very low probability, and would be politically poisonous.
Continental newspapers also have been reporting with enthusiasm on various construed "Bremain" scenarios - making it sound that it was all a bad dream, and that the most likely outcome is continuity. Austria finance minister, Hans-Jorg Schelling, yesterday came out with a smug remark that the UK would still be in the UK in five years time. Comments like these signal to us that the real Brexit shock is yet to happen. So far, the Remainers have only acknowledged that they lost the referendum. Many of them have yet to realise that they are actually leaving the EU. We presume that some of the more optimistic market reactions may have been due to that illusion.
We are now seeing the first immediate economic effects of the referendum. The best news is without a doubt the fall in the pound, which will ease the country's large - and, until recently, still growing - current account deficit. The second good news is the fall in house prices, starting in London where estate agents have been reporting a fall in asking prices of some 10-15%. These are not hard statistics, but there is clearly now a fall in demand for houses. The weakness is likely to persist until there is more clarity about the country's future.
There are reports that property funds are barring investors from withdrawing money - which is usually a first sign of financial stress. A persistent fall in house prices may lead to a bailout of the financial sector. But it is hard to blame Brexit for this. It was the trigger, but the problem surely was the bubble itself, the result of long-standing mistakes in housing policies. Since successive governments failed to enact policies to increase housing supply, the voters have decided to reduce housing demand by placing controls on immigration. The thing with bubbles is that they will eventually burst - only the path is uncertain.
The main political development yesterday was the first round in the Tory leadership election, which reduced the number of candidates from five to three - one was booted out, one withdrew. This leaves Therasa May, Angela Leadsom and Michael Gove as the remaining candidates, with the two women in front. The next round voting is tomorrow. By tomorrow even, there will be two candidates, who will then be voted on by party members. A YouGov poll for the Times has May 32 points ahead of Leadsom, but we assume that this gap will narrow as Leadsom's profile rises. But it is fair to say that May is the front-runner in this contest - and also the candidate most likely to maintain the unity of the party. And this requires that a relative hard form of Brexit is executed - i.e. not the EEA/Norway model that we would favour.
Deutsche Borse, meanwhile, took the decision yesterday that London cannot be the sole headquarters of its merged operation with the LSE. The company set up a committee to investigate what options will now be available. Dual headquarters is one of several possibilities. This is an example of how the Brexit referendum is creating facts on the ground. Stories like these, and the economic uncertainty that is holding back investment, will put pressure on the next government to proceed with the implementation of Brexit as fast as possible. The economic damage is containable, but probably not if the next government makes big mistakes, such as trying to prolong the Article 50 process unnecessarily.
The one long article we would recommend reading in full is Rafael Behr's investigation in the Guardian into how Remain lost the campaign. Apart from the problems we highlighted - especially the failure to make a positive case for Europe, and the failure of the Labour leadership to rally their supporters - Behr's investigation threw up another source of conflict inside the Leave campaign - political rivalries between the Conservative government and Labour.