South: HSBC economist warns of fraught months ahead as Brexit looms

Continued uncertainty over Brexit means UK markets are in for an ‘extremely fraught’ three months ahead, Mark Berrisford-Smith, head of economics at HSBC, warned attendees at HWB’s latest Economic Update seminar.

At the event, jointly organised by HWB and HSBC and held at the Ageas Bowl, Southampton, and attended by businesses from across the south, Berrisford-Smith said markets had still not recovered from the “currency shock” experienced after Britain announced its intention to leave the EU.

A slowdown in the world economy, fuelled in part by the growing trade war between the USA and China, and the reluctance of big corporations to invest in the UK against an uncertain backdrop were also contributing factors.

Berrisford-Smith noted that although consumers were still spending on personal items, big spending – such as house buying – had slowed. The construction industry is suffering as a result, with the number of new houses built down 9% on the previous year. Sectors such as travel, betting and retail were also “feeling the pain”, he said.

The first quarter of 2019 saw businesses stock up ahead of the March Brexit deadline, which meant Q1 looked positive – but when the deadline passed and shifted to October, businesses started to offload surplus stock. As a result, Q2 is likely to show a negative growth rate.

Whoever becomes the next Prime Minister will have a difficult task ahead on several fronts, Berrisford-Smith said. It looks unlikely that either of the two big parties will gain more than 40% in a forthcoming general election, challenging the PM’s ability to be forceful in negotiations with the EU. Meanwhile, a change of guard which will see both Jean-Claude Juncker and Donald Tusk replaced at the EU’s top table by the end of November, will see the PM facing the prospect of negotiating with both current and incoming members.

Berrisford-Smith was clear that the general public now seem more open to tax increases to counter the issues seen in public services such as NHS and education, or indeed the GDP deficit could be run at a higher level which may be needed in order to pay for the work required to hit the carbon targets.

Looking ahead to Britain eventually leaving the EU, Berrisford-Smith discussed the impact of both an orderly exit and a no-deal scenario.

He predicted that a No Deal was likely to result in a recession lasting around a year, and practical problems exporting key products including fresh produce and meats such as lamb and beef. The pound would fall again, consumer spending and consumer confidence would drop.

By contrast, if an orderly exit could be achieved, the pound may rise as the market reacts to more positive news.

Michaela Johns, director at HWB, said: “Our thanks go to Mark Berrisford-Smith for his no-holds-barred assessment of the uncertainty that remains in place around the Brexit process. Clearly, businesses will need to hold their nerve during a difficult period, but there is still the opportunity to emerge with a positive outlook if an orderly Brexit can be achieved. That is the challenge the new PM will face – and businesses will be watching closely as the new October deadline looms. If we do go into a recession then there is still scope to cut interest rates or use physical stimulus to ensure that the time in a recession is minimised.”