Get Ready For Pound To Rise – After Brexit Row Fades

UK manufacturing expanded at its fastest pace for two-and-a-half years in December, according to survey data released last week. Britain’s PMI manufacturing index soared to 56.1, up from 53.1 the month before – where readings above 50 indicate growth.

Our all-important services sector – no less than four-fifths of our economy – is also buoyant. Services growth hit a 17-month high last month, the PMI services index reaching 56.2, as employers saw a pick up in both new orders and jobs.

Unsurprisingly, then, the entire economy also expanded, according to the same company surveys. Britain chalked up an overall PMI reading of 54.2 in December, up from 52.8 the month before – boosted by a construction rebound and stronger exports.

I won’t – as somebody who publicly voted to leave the European Union – say I told you so. The UK economy remains fragile, facing many medium- and long-term problems. We have a chronic skills shortage, house building is still disastrously low and our banks remain “too big to fail” – an issue our political classes HAS singularly failed to address.

On top of that, just as in several other large advanced economies, the UK’s banks, zombie companies and even our government have become totally over-reliant on around £400bn of quantitative easing to date and counting – the promise there could be more crucial in keeping the show on the road. QE has suppressed market interest rates, warped bond markets, and, by artificially pushing up asset prices, sharpened wealth inequality while turning much of the Western world into an economic powder-keg.

For those reasons and more, it’s far too early to judge where the UK will be this time next year, let alone assess the economic implications of Brexit – not least as we haven’t yet triggered Article 50. What we can say, though, with increasing confidence as every new print of macroeconomic data is published, is that Britain has absolutely not experienced the “immediate and profound economic shock” which the Treasury loudly forecast would follow a Brexit vote, the then Chancellor repeatedly trumpeting as “fact”.

I’ve made this charge before but don’t apologize for doing so again. Our civil service matters. Public confidence in its independence is vital. Yet there were statistical sleights of hand and assumptions buried in the Treasury’s pre-referendum report which bordered on the absurd – as some of us exposed at the time – designed deliberately to generate headline forecasts painting Brexit in the worse possible light.

As the UK economy continues to perform rather well, despite our EU referendum result, it becomes ever clearer how mistaken the Treasury was. Economic forecasts can often be badly wrong – not least in the aftermath of a sudden stock market collapse, a natural disaster or other “black swan”. Since our Brexit vote last June, we’ve thankfully seen no such shock – we voted to Leave and, for the most part, the global economy has trundled on as before. Yet the UK, far from suffering a sharp economic contraction, as Treasury mandarins so confidently predicted, has registered solid growth – with the latest official figures pointing to a 2016 expansion approaching a healthy 2.5pc.

We now need a full and frank public investigation into why those garish Treasury forecasts were produced – exposing the extent to which political pressure was exerted in the preparation of what was supposed to be, and repeatedly presented as, an “independent report”. If that doesn’t happen, confidence not just in future Treasury forecasts, but the integrity and veracity of the entire gamut of official economic UK statistics, risks being permanently dented.

The reaction on currency markets to last week’s strong economic data was instructive – pointing to a likely pattern during the first quarter of 2017. Signs of stronger manufacturing and service activity should ordinarily see the pound rise against the dollar, euro and other currencies of the UK’s main trading partners.

The PMI surveys also contained testimony from companies of “rising costs pressures”, with a weaker pound increasing the price of firms’ imported inputs – from commodities to technical components. Signs of higher future inflation, then, likely to encourage the Bank of England finally to increase interest rates, should also cause sterling to rise.

To some extent that happened. The pound jumped above $1.24 last week, up around half a cent since the start of the year, while staying largely flat against the euro. Sterling probably failed to gain more on the strong macro data, though, due to the political fall-out connected with the bad-tempered exit of Sir Ivan Rogers, the UK’s former Ambassador to the EU. After resigning last week, his valedictory e-mail to staff was, of course, “leaked”. In it, he accused the government of “muddled thinking” and “ill-thought out arguments” relating to Brexit, while urging his erstwhile Foreign Office colleagues to “continue speaking truth to power”.

Let’s put discussion of Sir Ivan’s email to one side. But not before pointing out that someone paid handsomely from the public purse to give impartial advice and then keep his mouth shut, and who’ll continue to be paid handsomely from the public purse for the rest of his life, did something which was not only vain and misguided, but aimed solely at destabilizing, at a crucial moment, the government of the day.

I value the independence of our civil service extremely highly, as I just wrote. Not for me a US-style system involving the mass employment of political appointees. I’m glad then, that somebody who clearly can’t distinguish between “truth” and “opinion”, who doesn’t understand the overwhelming importance of confidential counsel, and who thinks it’s OK to engage in acts of political sabotage against the UK, is no longer part of the British civil service.

This is the shape of things to come. Over the coming months, as the end-of-March deadline for triggering Article 50 approaches, on-going political rows over the UK’s Brexit strategy are going to drag heavily on sterling. Britain’s current account deficit remains huge, widening to £25.5bn during the third quarter, no less than 5.2pc of GDP, up from £22bn during the three months before. That imbalance also weighs down the pound.

Since the Brexit vote, though, there are signs weaker sterling is starting to boost the competitiveness of UK goods abroad. In October, goods export rose by £2.1bn to reach £26.8bn – the highest level since the current data series began in 1997, with sales in non-EU nations also jumping to record levels. And in November, UK car production rose 13pc year-on-year, hitting a 17-year high – driven by record sales abroad.

For now, until Article 50 is triggered, every Brexit-related political skirmish will knock the pound against both the dollar and euro, limiting the extent to which decent growth and employment numbers will push sterling back up.

Once Article 50 is in play, I reckon the UK will fare far better than is widely assumed in our negotiations with the remaining 27 nations of the EU – who themselves are horribly split over issues such as trade access and freedom of movement. I’ve already written I can’t see the US Federal Reserve raising interest rates again this year, which will also confound market assumptions, causing sterling to rise.

I’ll also chance my arm by saying that, once we get into the potentially tumultuous Dutch election this spring, followed by very possibly tricky votes in France and Germany during the summer and autumn, the single currency will suffer, with sterling strengthening against the euro too. So, there’s a prediction for 2017. A stronger pound across the board.

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