LESSONS FROM LONDON

Brexit’ has been the topic “du jour” for several weeks now with a number of interesting points being raised both for and against Britain’s awaiting departure from the EU. A recent Reuters article by columnist Mr. Edward Chancellor challenges populist views on the economic turmoil Britain is currently facing suggesting ‘Brexit’ could instead provide a platform for long-term sustainable economic growth.

We found the article provocative leading us to draw parallels to the New Zealand economy.  We encourage you to read the article which can be found here:

Reuters columnist – Mr. Edward Chancellor – “Brexit can make a stronger, fairer UK” http://blogs.reuters.com/breakingviews/2016/06/28/chancellor-brexit-can-make-a-stronger-fairer-uk/

 The main points tabled by Mr Chancellor are:

• The principal driver of Brexit labelled as growing intolerance towards immigration was a ‘red herring’ - when the economy is travelling well foreigners are welcomed. The discontent that forced the majority to vote to leave the EU was caused by years of stagnant incomes with households struggling under a growing burden of excess debt;
   
• Voters generally view housing as unaffordable in the UK and there has been a marked increase in private wealth that is unequally distributed by geography and across the broader population;

• Years of stagnant incomes/weak household income growth – have been caused by Britain’s miserable productivity record over many years. (Note: Productivity growth is important because to grow income per person or household income, the person or household need to be producing more per hour to earn more per hour);

• A principal reason for the miserable productivity growth can be attributed to an era of ultra-low interest rates turning the UK into a bubble economy. A “bubble economy” is the type of economy that generates profits from shuffling bits of paper but little in the way of genuine value added to real/physical products. Signposts for a ‘bubble economy’ are – inflated asset prices whose earnings streams do not provide an economic return and may also rely on tax incentives or subsidies, low rates of savings amongst the broader population, widespread misallocation of capital, an overly large financial sector versus other sectors, and increasing amounts of foreign indebtedness relative to incomes (Note: The charts below sourced from the RBNZ – www.rbnz.govt.nz - highlight New Zealand’s positioning in terms of household sector debt levels and house price-to-income ratios highlighting the growing risks in our economy as well);

• The once spendthrift Brits have become totally dependent on foreign capital, with persistent current account deficits – a clear sign Britain is consuming more than it produces (Note: New Zealand has run a current account deficit since 1973 – see chart below from the RBNZ which details New Zealand’s current account deficit since 1990 – www.rbnz.govt.nz);

• Following the outcome of the Brexit vote there was a sharp fall in the Pound (“GBP”). This will clearly make British exports more competitive. In theory if exports are more competitive (cheaper than they were previously) this will make them more profitable and should direct capital back to traded-good sector (away from paper shuffling).

In our opinion there is a great deal for New Zealander’s to consider in Mr. Chancellor’s article.

The article also supports (in our view) expat businessman Mr. Stephen Jenning’s recent warning to all New Zealander’s (and our politicians) that we are “sleepwalking into an economically ugly place” via our continued complacency, lack of long-term planning and poor management within large parts of corporate New Zealand due to co-operative structures and government ownership.

 As usual we welcome your thoughts and comments.

Elevation Capital Management Limited