Brexit Five Years After Referendum Shows No Gain, Just Pain
(Bloomberg Opinion) -- It's been five years since U.K. citizens voted to exit the European Union and almost 200 days since they belatedly departed. The decision looks to be working in the U.K.’s favor – at least on the surface.
The economy will grow 6.4% in 2021, second-best among the Group of Eight developed countries, followed by a G-8 leading 5.4% gain in 2022, according to the median estimate of 60 economists surveyed by Bloomberg. The iShares Core FTSE 100 UCITS ETF, the largest exchange-traded fund investing in the U.K., shows record appetite for British equity, with money flows surging 126% since 2016 to an all-time high, data compiled by Bloomberg show.
Johnson’s seeming prescience and all that cash flowing into U.K. ETFs is belied by deteriorating productivity, the country’s eroding global trade and no sign the pound will rebound enough to erase the massive depreciation in sterling, which has been the worst performer among 10 major currencies since the referendum on June 23, 2016. Whatever strengths Britain musters through the end of next year will be fleeting because the economy already is a shadow of its once mighty self before Brexit was decided.
In the first hour after polls closed on that second-to-last Thursday in June, the pound rallied to $1.50 from $1.48 on speculation that the British people would accept the consensus view of domestic and international prime ministers, presidents, finance ministers, business leaders and economists and vote to remain in the EU. The market expected the U.K. to support remaining because it was widely perceived to be the best outcome for the U.K. Once the “leave” votes exceeded the “remain” votes, sterling plummeted a record 8.05% to a then 31-year low of $1.3229.
The pound's 6.3% depreciation against the dollar since the referendum made sterling the sick man among major currencies. Denmark, which unlike Britain never wavered in its commitment to the EU, continues to benefit from membership: the krone leads the foreign-exchange market with a 4.9% gain since June 2016. That's slightly better than the No. 2 euro, shared by 19 countries, which has appreciated 4.8%. Not even the pound's 23% rally from the pandemic-era low of $1.1412 in March 2020 can offset its relative weakness.
For an island nation historically steeped in global commerce, the U.K. saw business with its biggest trading partner drastically curtailed. Trade with the EU tumbled 21% since 2018 to $38.7 billion, the least in 11 years. In contrast, fervently pro-Europe Ireland and Denmark increased their trade with the EU by 24% and 5%. Britain's international trade declined 14% since 2018 as total world trade shrank 8%, according to data compiled by Bloomberg.
For much of the 21st century, the U.K. -- abetted by London's command of international financial services -- was the G-8 leader in terms of economic growth, and was No. 1 in 2014, and No. 2 in 2015 and 2016. The referendum transformed Britain into an also-ran, with U.K. GDP growth sinking to No. 6 in 2017 and 2018, No. 5 in 2019 and most likely worst in 2020. Even if the forecasts are right and Britain rebounds to No. 2 in 2021 and No. 1 in 2022, it will revert to a snail's pace of 1.8% in 2023, not much better than Japan's 1.2%, according to economists surveyed by Bloomberg.
Bank of England Governor Andrew Bailey, in his first public comment since Britain completed its Dec. 30 withdrawal from the world's biggest trading bloc, told the House of Commons in January that GDP will be as much as four percentage points lower in the years ahead than it would have been had the country remained in the EU.
While Britain is diminished, Greece is the opposite: eschewing rejection of the euro, embracing EU membership and rebounding from a debt crisis and depression caused by the financial crisis. Greece’s economic growth will exceed the EU’s advance of 4.4% by almost a percentage point in 2022 and continue to outperform in 2023, according to 18 economists surveyed by Bloomberg. Total trade between Greece and the EU increased 16% since 2018.
The stock market performance of U.K. real estate companies, traditionally leaders among those in 16 western European countries, is anemic since the referendum. During the five years prior to the 2016 vote, U.K. firms gained 154% on average, the No. 4 total return (income plus appreciation) out of 124 publicly-traded real estate companies in the western European countries. The U.K. group slipped to No. 6 during the past five years, with a 74% total return, trailing the overall group's 106%, according to data compiled by Bloomberg.
The relative weakness of U.K. real estate companies is exacerbated by their steep valuations, trading at prices that are on average 36 times their future per share earnings, the highest for Europe and 41% greater than the average for the region. The U.K. ratio is also 32% greater than the second-most expensive country, Switzerland.
``One reason for the disparity could be that investors are looking further ahead at the rebound in rental income which may be more pronounced in the U.K. peers,'' said Sue Munden, a Bloomberg Intelligence European property analyst.
Corporate Britain, meanwhile, continues to be less competitive. U.K. companies' sales per employee, a measure of productivity, totaled $2.4 million, or No. 6 among 20 western European countries in 2015. That was 13% above the region's average. In the most recent year, revenue per employee declined to $1.3 million, or No. 12, according to data compiled by Bloomberg.
Booming British ETF money flows mask another reality check: U.K. shares remain underwhelming, reflected in the inferior return of 31.5% for the MSCI UK Index compared with 96.3% for the MSCI All-Country World Index since June 23, 2016.
Brexit in its infancy is proving to be of no benefit to anyone save the politicians who championed it. If anything, markets have determined five years after a majority of Britons voted against their own interest that Brexit is undermining historic advantages in London-based financial services and disrupting EU commerce, which accounts for about 50% of British imports.
The meaning of Brexit is no gain, just mostly pain.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Matthew A. Winkler is Co-founder of Bloomberg News (1990) and Editor-in-Chief Emeritus; Bloomberg Opinion Columnist since 2015; Co-founder of Bloomberg Business Journalism Diversity Program in 2017. During his 25 years as Editor-in-Chief, Bloomberg News was a three-time finalist and winner of the Pulitzer Prize for Explanatory Reporting and received numerous George Polk, Gerald Loeb, Overseas Press Club and Society of Professional Journalists and Editors (Sabew) awards.
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