22 December 2022: Brexit, an unmitigated disaster

Brexit was never about economic independence. Voters were swept along on a tidal wave of jingoism and promises of how much better life would be if the country was free of the shackles of Brussels.

Now, coming up to seven years after those shackles were broken, even the most ardent Brexiteer must be doubting the benefits of leaving. For the man in the street, there has been no discernible benefit.

Yes, it is true that the United Kingdom would have faced increasing pressure to join monetary union, but in reality, it was only a misplaced sense of historical significance that precluded the country from adopting the single currency.

Now, that ship has sailed, and it is only a matter of conjecture whether from an economic perspective it was the right decision. There is already some consideration being given to closer ties and even having a Swiss style relationship, where in exchange for a contribution to the budget, Britain would become members of the single market.

Although such a suggestion has been dismissed out of hand, by the current administration, it may be a policy that is looked at more closely further down the road.

It was reported yesterday Brexit has left the economy 5.5% smaller. This according to the Centre for European Reform, which is pro closer links to the European Union. It is also blamed for the current squeeze of services that is part of the cause of the current industrial action in the public sector.

The continued disruption that is being caused by current strike action by nurses, ambulance crews, and train drivers, is set to continue with each announcing fresh dates for strikes well into the New Year.

The Government position is becoming more entrenched as it not only insists that the offer that is on the table is fair and just, but is blaming nurses and ambulance crews for unnecessarily endangering public safety.

Rishi Sunak’s brief honeymoon period is now well and truly over, as he faces several unrelenting challenges before, he even considers how to get his disparate Party into shape to face a General Election.

The financial markets have slipped into Holiday mode, with the prospect of two shortened weeks approaching. Yesterday, Sterling lost ground against the dollar but remained within its current, narrow, range. It fell to a low of 1.2055 and closed at 1.2087. Any threat to longer term support at 1.20 may cause a flurry of activity, but that apart, the winding down towards year-end has begun.

The words and deeds of the Federal Reserve seem to have become unattached over the past few weeks, as first the minutes of the November FOMC meeting, and then the Chairman of the Central Bank both took on a more dovish outlook only for short-term interest rates to be hiked by a further fifty basis-points.

It is classic Fedspeak to lull the market in order to achieve maximum effect from its actions.

Admittedly the hike was smaller than had been agreed at previous meetings, the market, while hardened to the continuous tightening of monetary policy hoped that an even a small hike could provide at least a nod towards a slowdown in the economy.

The Fed, Treasury and President all seem to want to avoid mention of the R-word at all costs, even stretching belief by commencing that a contraction lasting two consecutive months won’t denote a recession.

They base their comments on the fact that employment continues to defy all logic by continuing to grow. It is almost as if the Fed is saying, how can we be in recession when the economy is creating a quarter of a million jobs every month?

It may look like a recession and feel like a recession, but to defy the old adage, it still isn’t a recession.

The minutes of the December meeting of the FOMC are due for release in the first week of January and will make interesting reading. They are due for release on January 4th, immediately preceding the December employment report.

If the minutes have a dovish feel, and the data is weaker than trend, the Fed may be inclined towards an even smaller hike than seen in November.

Economic data, other than employment and inflation, is taking something of a backseat at the moment. Data will have to be significantly out of line to cause anything more than a ripple.

Yesterday, the dollar index gained a little ground after two days of lower closes. It rose to a high of 104.38 and closed at 104.25

To misquote Mark Twain, rumours of the death of the single currency have been greatly exaggerated.

However, it is hard to imagine how the European Union could possibly survive another high-profile defection, particularly if the defector was Italy, given its support for the experiment, which has, so far, been staunch and unwavering.

The Union has agreed to its further expansion by allowing Croatia to join the currency Union on January 1st, but it is in danger of losing another member, although any thought of Italy departing is a long way in the future.

While Croatia reaps the benefits of full membership, such advantages will for now be denied to Romania and Bulgaria due, in the European Commission’s words, concerns over organized crime and unauthorized migration.

The vehemence with which Italy received the news of the latest hike in rates by the ECB was slightly out of step, given that it was both hardly unexpected and its size was less than it could have been given the level of inflation.

It is interesting to note that the more affluent members are also the most hawking about inflation, which leads them to view their membership through a lens of economic harmony, while the less well-off and inflation prone nations view membership as a method of levelling the playing field.

In Italy’s case, even more than any other nation, if their government believes that they are not receiving the level of support they believe that their membership grants them they may well begin to create waves and promote disharmony.

Furthermore, if they are unable to comply with the revised growth and stability pact when it comes into force, they may face an extremely tough decision.

The euro drifted aimlessly yesterday. It traded between 1.0645 and 1.0590 closing barley changed on the day at 1.0611

Have a great day!