Brexit / Trump…

Rob Carnell

…implications for Europe and the World

November 2016

Photo source: Somodevilla/Getty Images

BrexitWhat it means for the UK and Europe

The people of Scotland and Northern Ireland voted clearly to remain in the EU. What they voted against is clear… But what they were voting for was not.

Article 50 will only be triggered once the UK’s position has been decided. This is unlikely to be before 1Q17.

Europe is exposed to the Brexit risks. A weaker UK growth outlook and weaker sterling means exporting to the UK will become more difficult. The political uncertainty is likely to hit growth.

Key Themes

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Photo sources: Getty Images

The world was taken by surprise over Donald Trump’s victory at the US

presidential election. However, the policy stances Trump actually takes

remain the great unknown

US politics has changed radically and for good. A Trump victory represents a

vote for change, but exactly what is unsure

Markets hate uncertainty, and the near term represents a potential period

of heightened risk aversion. The election result is not the end of the

process, but the beginning

TrumpHow did it all happen?

TrumpWhy?…

4

Total

Men

Women

White

Black

Hispanic

18-29

30-49

50-64

65+

Postgrad

College grad

Some college

HS or less

Ge

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Eth

nic

ity

Ag

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Clinton

Trump

What makes a Trump supporter? (1)Education / age / ethnicity / gender …anger!!!

• It is not surprising that Trump is less popular with Hispanic and Black voters…• …or his apparent misogyny did not warm the hearts of many female voters

Source: Pew Centre for Research

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What makes a Trump supporter? (2)Angrier

0

10

20

30

40

50

60

70

80

90

Falling behind Staying even Going up faster Falling behind Staying even Going up faster

Trump supporters Clinton supporters

Perc

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f fa

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%

$75000 ormore

$30000 -$74999

$30000 or less

Family Income:

• In all income groups, more Trump supporters feel they are falling behind the cost of living; angrier yes, but not necessarily poorer – WAMO (White, Angry, male, older)

How do you feel about your financial condition?

Source: Pew Centre for Research

TrumpWho / what?…

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Trump: Who is this guy?S

oft

Ha

rd

Loose Even looser

Po

liti

cal

Macro policy

Tough Trump Trump Democrat

Home TrumpTrump-Lite

Deflation Stag - deflation

Modest expansion Inflationary

Mega-trade deals in trouble

TPP TTIP RCEP

AustraliaEuropean

UnionAustralia

Brunei Darussalam

United States

Brunei Darussalam

Canada Cambodia

Chile China

Japan India

Malaysia Indonesia

Mexico Japan

New Zealand Lao PDR

Peru Malaysia

Singapore Myanmar

United States

Philippines

Vietnam Singapore

Thailand

Vietnam

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Trump’s fiscal pledges – Debt Ranges - estimates

60

70

80

90

100

110

120

130

140

150

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

% o

f G

DP

Trump Range Current Law Trump Central Estimate

Projections on national debt ratio - central estimate and ranges

• Given incomplete, and in some cases contradictory statements, these estimates are not to be taken too literally…

• …they also may inadequately incorporate any GDP growth effects…• …even so, Trump has a much bigger impact on national debt than Clinton

Source: CRFB

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Nato….challenged

0

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Defence spending (% GDP)

• Brexit has damaged the EU…

• EU defence spending has been a victim of austerity

• Trump has been courting Putin and sounding negative on NATO

• Russia may feel emboldened

BrexitWhat it means for the UK

1. What are the aims of the Brexit negotiations:

Constraints on migration and a trade deal that is as close

to single market access as possible

2. When to trigger Article 50 and start 2-year clock on

negotiation a deal: After agreeing on the UK’s position,

so sometime in 1Q17, but European elections could

complicate the situation – as could recent High Court

decision.

3. What to do to mitigate the negative short-term

economic impact of Brexit: Emergency budget with

lower corporation tax, VAT cuts, infrastructure spending.

BoE to loosen monetary policy further

4. How to keep the UK together: Greater devolvement,

more autonomy, extra money for regions. Another

Scottish independence referendum looks unlikely in the

near term – terrible fiscal numbers & low oil price

5. How to re-engage with the angry and alienated: Relax

austerity measures, action to boost access to housing.

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The Prime Minister’s inbox

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Life outside of the EU: Some of the UK’s options

EEA Membership (Norway)

Unilateral Model (e.g. Hong Kong)

United Kingdom

Potential Exit Routes

Bilateral Agreements (Switzerland)

Customs Union (Turkey)

Free Trade Agreement (Canada)

WTO Membership (default option)

Transition state?

• Nissan had warned that future car production in the

UK was under threat due to potential tariffs

• However, government “support and assurances” led

to a change of heart and two new models will be produced in Sunderland

• UK may be going for an industry by industry deal structure (A Switzerland plus model?)

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Cars and the City

• The City is the other huge concern

• Thousands of firms, £billions of

revenue (12% GDP) all resting on the

issue of “passporting”

• The EU will oppose “cherry picking”

• The UK may be looking at a long

transition period – ongoing access to

the single market so long as it obeys the rules

BrexitWhat it means for EuropePt 1 – the economy

Implications for Europe - trade

• The US is the UK’s biggest trade partner, but US-UK trade is small as a proportion of the US

economy so the US will probably agree a trade deal quickly

• Belgium, Ireland & Netherlands’ exports to the UK are far more important for their

respective economies – accounting for 7.5-11.3% of their GDP

0

2

4

6

8

10

12

Exports to the UK (% of each country's GDP)

services

goods

* Irish exports to the UK by value are equivalent to 11.3% of Irish GDP

Implications for Europe – financial costs

• The UK is a net financial contributor to the EU budget

• Big net contributors, such as Germany the Netherlands and Belgium, may be asked to pay more to the EU

• Or net recipients may get less money

• Will Europe become more interventionist if the UK is no longer a member?

• French & Spanish banking losses given high exposure to the UK?

• BUT Europe could benefit on the FDI front as businesses move away from the UK in favour of continental Europe

-1

0

1

2

3

4

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6

Sw

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Denm

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Ge

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Belg

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Austr

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Hung

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Net receipts from EU (% of Gross National income)

BrexitWhat it means for EuropePt 2 – Politics

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Political uncertainty unlikely to disappear

Brexit

New elections?

Referendum

Rerunpresidential elections

Referendum

Presidentialelections

Elections

Elections

23 Juneaverted

2 Oct

4 Dec

Apr/May

Mar

Autumn

• Both the Trump votes and Brexit can be boiled down to a rejection of the status quo – these were not votes “for” something, but “against”

• Are the people of Europe so satisfied with what they have now, the the same will not happen somewhere here?

• If the answer you have is “yes”, did you think that Brexit would happen, or that Trump would be elected?

• Is your answer still the same? (angry people more likely to vote)

• What can governments do to stave off the same in their own countries?

• It won’t be easy to devise solutions, but the problems are clear: • Unhappiness about immigration• Unhappiness about jobs / wages• Unhappiness about inequality• Unhappiness with establishment (politicians, banks, institutions (EU / EZ))

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Radical change vs more of the same