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Analysis

May fiddles as business feels the heat

by Stewart Fleming | 15.06.2017

A general election that business leaders and financiers did not want, and which has turned out far worse than many imagined, has unleashed a torrent of recriminations against Theresa May’s government.

Business criticism of the government has been largely pent up until now. Senior City sources told InFacts that the prime minister’s defenestrated chiefs of staff Nick Timothy and Fiona Hill had threatened to restrict access to government policymakers if City representatives registered any public dissent on her Brexit negotiating stance. So silence reigned.

Then, when a weakened prime minister returned to Downing Street last week, the floodgates opened. Caroline Fairbairn, director-general of the CBI, the leading employers group, warned that uncertainty about the prospects of a deal with the EU was already resulting in “a gradual, silent, drip drip drip of lost investment and missed opportunity”.

The Institute of Directors quickly released a snap poll of its members which concluded that, in response to the hung parliament, business confidence had sunk “through the floor”.

The sober Engineering Employers Federation (EEF) called for a “careful rethink” of the UK’s negotiating strategy and the British Chambers of Commerce for a “workable administration” to build confidence.

In the City, there are warnings that finance, too, is suffering, its own “death by a thousand cuts”, as one executive put it. Quietly, banks and insurance companies are responding to the uncertain Brexit outlook by beginning to shift to Frankfurt, Paris, Amsterdam and other parts of the EU segments of their businesses which are likely to have difficulty operating profitably outside the single market if and when the UK Brexits.

City practitioners say that these financial centres are well prepared with advice and support to help them move, and some London-based firms are discovering that they are more attractive locations than they imagined.

The EU Commission added to the pressure on Tuesday when it published a proposed regulation on the relocation from London of central counterparty (CCP) business.  CCPs play a crucial – and for London, profitable – role in reducing risk in the giant over-the-counter (OTC) financial derivatives markets. The business is also huge, worth globally, the Commission said, $544 trillion at the end of June 2016.

Far from giving London the all-clear to hang on to this business, the interpretation some UK commentators leapt at, the draft proposal targeted the City’s CCPs. The EU draft, which is likely to be implemented, says that the EU can require that if the business of a CCP is deemed to have exceptional “systemic importance” – as London’s (and Europe’s) biggest OTC derivatives clearer, LCH.Clearnet, certainly does – it may “only be able to provide services in the Union if it establishes itself in the EU”.

Even if re-location is not required, the Commission draft signalled that such systemically important CCPs will have to comply with EU regulations and submit to EU supervision – so much for “taking back control” and May’s nationalistic “red lines”.

Meanwhile, as a divided British government scrambles for a strategy, the country’s economic foundations are crumbling. Growth will approximately halve between this year and 2018 to 0.9% and unemployment will rise to 5.3% from 4.8%, according to recently published OECD forecasts. Inflation too is rising, hitting 2.9 % in May.

But Britain’s economic policy levers are dangerously paralysed. With a debt to GDP ratio close to 90%, there is no room for fiscal stimulus. As for lowering interest rates, with inflation well above the official 2% target and consumers gorged on debt, there is already speculation that the Bank of England may be forced to raise them. The UK’s combination of policy and political paralysis could easily make the pound a tempting target for speculators.

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Edited by Michael Prest

One Response to “May fiddles as business feels the heat”

  • It is appalling and frankly, terrifing. It is all about an internal fight by the far right of the Tory party and nothing whatsoever to do with the good of the country. It is like walking over a cliff edge.