Blame Brexit. It is still only three weeks since we voted to leave the European Union. Apart from the political class going into meltdown, nothing has actually happened yet. We haven’t triggered Article 50, which sets the process in motion, nor have we begun talks with the rest of Europe. Whatever deal we end up with, we still have full access to the single market, and freedom of movement for workers.
Yet that hasn’t stopped companies rushing out profit warnings. IAG, owner of British Airways, took less than 24 hours to say its earnings would suffer. Rival Easyjet quickly followed suit. Estate agent Foxtons said it expected to be hurt by slowing London property sales. Expect to hear similar stories from many other companies – and finance ministers – in the coming months.
Of course, some of these will be justified. London property may well slow down, as people await the impact of the decision. Some funds have already blocked withdrawals. Some banks may suffer as initial public offerings get pulled. Some exporters may see orders cancelled. But a lot of it will also be nonsense.
The truth is that the vote to leave was mainly a political rather than an economic event. The impact on businesses will be fairly small. The UK accounts for only 3.5% of global GDP, and exports to the EU are about 13% of our economy, so less than 0.5% of global output is affected in any way at all by the result – hardly even a rounding error.
Even UK exporters will find that World Trade Organisation rules mean that even in the worst-case scenario only very modest tariffs can be imposed by the rest of Europe – more than compensated for by the recent 10% drop in the value of sterling. In other words, 99% of business should carry on as normal. That is not to say that Brexit doesn’t matter. Our trade relationship with Europe will shape the economy for a long time to come.
For example, we may come to rely less on cheap immigrants, which will force companies to invest more in productivity. We may strike better trade deals with the rest of the world, which will help us tap into faster-growing markets.
Alternatively, if this is the trigger for a rolling back of globalisation, that will be bad for us and the rest of the world too. But all of this will take place over a long time frame. So investors need to be very alert to phoney Brexit “kitchen sinking” – that is, rushing out bad news, and blaming it all on the Leave vote.
What should we watch out for in particular? The retail sector is in a lot of trouble anyway. A few shops will be hit by higher import costs, and any knock to confidence. But any retailer that blames Brexit for its problems was almost certainly in trouble before the vote. Banks are wilting under competition from new technology-based rivals. Many have too many staff, too many branches, and terrible brands – far more likely reasons for trouble than Brexit.
The car industry too faces huge challenges from electric and self-driving vehicles, not from our position on the EU. On a bigger scale, much of the eurozone – Germany in particular – was heading into a slowdown before last month. Brexit is hardly to blame for that, despite what you might be hearing from finance ministers over the new few weeks.
So keep your wits about you. The markets are usually full of nonsense. This summer it will be even harder than usual to sort the truth from the rubbish.