Back to the Future - Is the UK close to a re-run of the political volatility of 1992 to 1997?

A recent report in the Financial Times suggested that in the event of a hard Brexit, the European Commission would still allow EU banks to continue to use London clearing houses for euro transactions, at least temporarily.

This is a big retreat from previous talk of London losing its euro clearing business entirely. Meanwhile, a survey by Reuters found that so far, just 630 jobs from London-based financial and insurance firms have relocated to the EU due to Brexit. That equates to 0.16% of London’s financial workforce. 

To be fair, Brexit has not yet happened, but it is just five months away. Yet, employment in London’s financial sector is higher now than in June 2016 – 406,000 jobs, up from 393,000 at the time of the referendum, according to ONS. London as a whole has seen 62,000 jobs created in 2018 alone.

Rather than fading as we draw closer to Brexit, UK GDP has accelerated over the spring and summer months, reaching a punchy 0.7% in the three months to August. 

However, the facts above are a far cry from the very downbeat political narrative on Brexit we hear on a daily basis. The dilemma for the property industry is: does one focus on the economic statistics or the politics?  

Overall, we have a situation that is close to a re-run of the politically volatile period of 1992 to 1997, under former-Prime Minister John Major, when the government tore itself to shreds over Europe; and the economy moved into an upswing.

In 1992, a failed attempt to keep the pound in the EU’s Exchange Rate Mechanism badly hit the government’s credibility, just as a bruising row in Parliament erupted over Europe’s Maastricht treaty. A sense of political drift set in, which the Major government could not shake off post-1992, even though GDP was gaining momentum again. 

Even after the Maastricht treaty passed through Parliament, the quarrels with rebel backbenchers continued, adding to the sense of political disorder. This ironically coincided with a tech boom reaching Britain in the mid-1990s from the US, plus a new growth phase for London’s financial cluster. The economy prospered, while the government sank. 

In 2018, a shadow has passed over the political debate, which no amount of good economic news can dissipate. Yet, firms still need to make payroll, meet debt repayments, and defend market share, so they have to trade on despite the angry politics. Consequently, the economy continues to turn, helped by the latest wave of the tech revolution, and a cheaper pound. All very similar to John Major’s era. 

We believe that the Eurosceptics are not strong enough in Parliament to force through a hard Brexit. Consequently, a fudged EU withdrawal agreement will in our opinion pass through the House of Commons in the winter, clearing the way for a transition period, then a free trade deal on the Canada +++ model; as already hinted at by Michel Barnier, the EU chief negotiator. 

Without a hard Brexit we see growth continuing. The OBR is forecasting the unemployment rate to fall to just 3.7% next year. Yet, it is unlikely the angry exchanges between Brexiteers and Remainers will end soon. If the economy continues to grow, the property industry may want to look for ways to drown out the political noise, and concentrate on the economic statistics. 

Read more in the latest Central London Quarterly Report Q3 2018