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From the impact of Brexit to the prospect of a European Banking Crisis

Well it is becoming increasingly clear that the initial impact of Brexit or more strictly the announcement of a Brexit will not bring forth recession. This is indeed what I said in my blog of 14 July when it was very much a minority view. Forecasts have all been revised up by various institutions like the OECD and the IMF and by international banks to around the GDP growth numbers that I suggested back in the gloom of July, namely 1.75% for this year and 1% next year - and if anything I would say these are now on the Conservative side. Thus nearly all major indicators are doing well including retail sales and consumer confidence, house prices, services sector output, and business confidence. In addition financial market variables have generally done well, with even sterling recovering somewhat.

So why were the forecasts so gloomy and clearly wrong? Well I think there are four reasons. Firstly the economic data underestimated the strength of the economy going into the referendum. For example, GDP in Q2 is now thought to have risen by 0.7% on the quarter well above initial estimates. Secondly it was due to the politicisation of key institutions including the IMF and more obviously the UK Treasury and Bank of England. Thirdly, is reflects the state of macroeconomics and the herd instinct of many economic commentators and finally it is fair to say that the Bank of England took prompt and appropriate action in loosening monetary policy via a number of methods.

But of course it is not all going to be rosy. In the medium-term there will be adverse consequences on what will be difficult and protracted negotiations with an EU which is standing firm on its unwillingness to compromise on the trade-off between access to the single market and control of borders, despite the prospect of the EU being adversely affected too. However as we seemingly move towards a hard Brexit again as previously predicted, it is hoped that these negotiations can be completed more quickly enabling us to travel to the point where we can free trade with the rest of the world and hopefully with the EU too, via being an independent member of the World Trade Organisation. I continue to have a very positive outlook for the UK in the long term, perhaps as part of a Commonwealth free trade union with Australia, Canada and New Zealand leading the way. These are countries we have so much more in common with than the EU.


Finally I would also like to mention the banking problems in Italy and now Germany. While not wanting to minimise the impact of Brexit on the UK and on the Eurozone too,  the biggest immediate fear is that of a European Banking Crisis.  The problems are hardly surprising in that they largely reflect the poor health of the Euro Zone and the flaws of European monetary union without fiscal and political union. At the moment the problems at Deutsche are unlikely to be Europe's Lehman moment and a boost its capital should help. I am more concerned about the solvency of Italian banks and the not unrelated constitutional referendum in early December which will in effect be another big test for the EU and could see the Italian government fall.


*Patrick Dennis is a British Economist currently working with Oxford Economics. He has spent nearly 40 years working as an economist in the City of London and its environs. He served as Chief Economist at the Industrial Bank of Japan and was also  senior economist for both National Westminster Bank and Royal Bank of Scotland. He holds a postgraduate degree from Corpus Christi College, Oxford University.


This post had previously appeared at http://ukmacroeconomicspolitics.blogspot.ae/2016/10/from-impact-of-brexit-to-prospect-of.html

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