DAILY RECKONING presents

7 Truths the Government Won’t

Tell You About Brexit

By David Stevenson

A Daily Reckoning Report

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Is Brexit such a big deal?So Britain has voted to leave the EU club. Brexit is here.

In the days ahead there’ll be endless talk, speculation and post-poll political fallout. That’s an area I generally try to avoid discussing. My main concern is the financial markets, with both sterling and global stock prices tumbling straightaway after the EU referendum result.

As investors, we want to know what’s going to happen now. That will depend on how big a deal Brexit really is. In fact, despite the immediate market reaction, I believe that actual changes will be rather less dramatic than widely assumed. Further, they’re set to take longer to implement than the market currently expects.

For starters, let’s look at what’s already been said by the financial bigwigs.

Bank of England boss Mark Carney has already done his oil pouring on troubled water routine, saying that although “there will be a period of uncertainty and adjustment following this result”, the Bank “will not hesitate to take additional measures as required as markets adjust and the UK economy moves forward”.

We used to take such pronouncements from central bankers with a pinch of salt. But we’ve learnt from the 2008/09 financial crisis that these guys aren’t scared to slash interest rates or print more money if things start looking rough. And as Mr Carney points out, the capital requirements of the country’s largest banks are now ten times higher than before that crisis. This should be enough to prevent any real panics.

IMF Managing Director Christine Lagarde is also doing her own bit of oil-wheeling.

“We urge the authorities in the UK and Europe to work collaboratively to ensure a smooth transition to a new economic relationship”, she says. “We strongly support commitments of the Bank of England and the ECB to supply liquidity to the banking system and curtail excess financial volatility. We stand ready to support our members as needed.”

In other words, the IMF may not like the Brexit result. But it’ll help to work it out.

Now for the UK’s negotiations with the EU: here’s the likely turn of events.

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Despite the immediate market reaction, I believe that actual changes will be rather less dramatic than widely assumed.

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Departing PM David Cameron has just suggested that the British people will expect the EU exit process to start straight away. But before Article 50 – the formal withdrawal notification - is served, there’s plenty of scope for preliminary talks with the EU top brass. Even when the process becomes official, it could take at least two years to be completed. In financial market terms, that’s almost a lifetime.

Trade discussions could take a while to arrange. But “although some of the smaller details might take longer to tie up, surely the most important things – which would have the biggest bearing on the economy – would be sorted out first,” says Vicky Redwood at Capital Economics. “Even if negotiations did take a decade, the economy wouldn’t exactly grind to a halt”.

The UK’s trade with the EU has been declining, as has the manufacturing sector’s share of our economy. If they’re not negotiated away, any possible EU tariffs would mainly impact manufactured goods. And those tariffs have fallen to an average of around 4%, according to Word Bank data, meaning that Britain would be protected from anything too severe on this score.

“Of course, tariffs vary by sector and some exporters (e.g. the car industry) would be hit harder than others,” says Redwood. “But the government could compensate the hardest-hit sectors, at least in the short run. And in the long term, the UK economy is flexible enough for there to be a reallocation of resources from industries that a Brexit made less competitive to those that became more competitive.”

Yes, Britain leaving the EU will incur other costs. But as there’d be considerable advantages for both sides, I believe there’s a very good chance that we could negotiate a ‘soft Brexit’ agreement giving us special access to the single market.

Sterling may prove to be weak during part of the negotiation period. But that has a plus side. It will boost Britain’s exporters by making our good cheaper to external buyers – as happened with sterling’s exit from the ERM in 1992. Indeed, within a few years the pound actually rose higher than its ERM departure level.

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Meanwhile, UK consumer confidence doesn’t look likely to collapse. More than 50% of voters got the result they wanted and surveys have shown that most Britons have never expected Brexit to damage their financial well-being. This raises a question mark over the possible ‘major economic shock’ that, pre-poll, the government warned would result from a Brexit.

The Chancellor has warned about possibly imposing extra austerity in a post-Brexit emergency Budget. But he actually has scope to borrow more money in the case of shocks. And tightening the fiscal belt would be so unpopular that I reckon he – or his successor – would be unlikely to be too tough. Meanwhile, GDP growth over the next two years is set to be sluggish. But it was always likely to be, Brexit or no Brexit.

I’ve talked about immigration into Britain before. Has it held down wages and pushed up unemployment for UK nationals?

No, says Ed Smith at Rathbones, the evidence suggests that this hasn’t happened. As a result, he wouldn’t expect wage growth to increase or unemployment to fall substantially post-Brexit. I’m not convinced that Britain leaving the EU will lead to a massive fall in immigration in any case.

Further, the benefits of being in the EU are smaller than they were a few decades ago. And Brexit gives Britain a great chance to set up its own trade deals with non-EU countries. These may find that dealing with Britain becomes easier and quicker with us no longer mired in EU bureaucracy and red tape. The UK could even develop its own unilateral free trade policy. In the long term, we could be better off.

Financial services and the City have been a major talking point before the referendum. There have been scary tales about potential mass sackings as Britain’s financial sector loses business to mainland European centres such as Paris and Frankfurt. The departure from London of a big banking name could be the catalyst, or so the stories say.

Yet at the moment this is all speculation. The City may well feel the pinch to some extent. It has, though, consistently shown its flexibility over the years in adapting to changing circumstances as well as potential problems.

Again, Brexit will enable the UK to broker trade deals with emerging economies that would prove very beneficial to the financial services’ sector in the long run.

Some fears have been expressed over declining direct investment. But “concerns about a drying up of foreign direct investment if Britain votes to leave the European Union are somewhat overblown”, notes Capital Economics.

“It is likely Britain would remain a haven for foreign direct investment flows even if it was outside the European Union. We could see a period of weak foreign direct investment inflows as the UK’s new relationship is renegotiated. However, if Britain is able to obtain favourable terms, then foreign direct investment would probably recoup this lost ground.”

Could plunging property prices be another by-product of the result? All the press releases that I’ve read post-result have suggested that much of the housing market will barely feel the Brexit effect. Maybe, though at the very least I’d expect to see London prices dip as the flow of foreign buyers dries up. And anyone trying to purchase a property in London would surely welcome that!

Brexit gives Britain a great chance to set up its own trade deals with non-EU countries.

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It’s over to star fund manager Neil Woodford for the last words on the result. He has repeated his long-held belief that the longer-term impact of Brexit won’t be as bad for the economy as it may seem at first glance, reports What Investment.

“Markets are clearly shocked by the decision but, in our view, it is not as negative a development as the market’s initial reaction appears to imply”, he says. “We have been clear in our thinking on the economic implications of Brexit for some time, that Britain’s long-term economic future would be largely unaffected by a decision to leave the European Union. We stand by these conclusions.”

Indeed, I believe that the UK economy, along with the rest of the world, is facing much bigger longer-term economic issues than any Brexit fallout. Ongoing low growth and possible deflation remain on the global agenda. And they’ll be the factors that will really determine the future for your investments. Click here to find out how.