Post-election economic update

Following the establishment of a new government and at the start of the Brexit negotiations, our June webcast saw James Cliffe, Head of Business Banking UK, and Mark Berrisford-Smith, Head of Economics for UK Commercial Banking, discuss the ways in which UK businesses and the economy may be impacted.

Below, we provide a brief summary of the key topics covered during the webcast, from interest rates and inflation to the strength of the pound.

Brexit - is it still full steam ahead?

The short answer is yes. Article 50 was triggered in March so we've already used three months of our allotted two-year timeframe. “We have to crack on, we have no choice. The clock is ticking…” (3:30)

It's likely that the first step will be to tackle “some of the easier stuff - like citizenship rights - and begin trying to get our heads around the methodology for working out the bill… but we haven't got long.” (3.45)

We have to crack on, we have no choice. The clock is ticking…

Political uncertainty

Even with DUP support, there will be a limit to what the Conservatives, who were left short of a majority, will be able to get through Parliament. As such, it looks unlikely that they'll be able to stick to their initial plans regarding Brexit, which included leaving both the Single Market and the Customs Union. “The softer options are now back on the table.” (4:50)

“I suspect that where we may be heading, after a period of some uncertainty and confusion, is a situation that still sees us leaving the EU in 2019, but with a longer and maybe softer transition.” (6:20)

The uncertainty around Brexit and the ability of the Government to drive through legislation may impact on business investment. “Will businesses feel that they are now confident to take investment decisions, will firms put some of the capital spending decisions on hold while they wait for the fog to clear?” (8:20)

Interest rates and MPC vote

The results of the recent Monetary Policy Committee (MPC) vote came as somewhat of a shock. In the recent past, we've seen only one of nine members of the MPC opting for hikes to the rate of interest, but now we've got three. If just two more are persuaded, we could see an interest rate rise.

“Our thoughts are that it will just about hang fire, but what the vote suggests is that they may not be quite as prepared to look through high inflation rates as we thought they would be. (17:00) They do seem to be getting quite twitchy… so it's maybe going to be a closer call than we first thought.” (17:26)

Accelerating inflation and the UK economy

Inflation, which currently stands as 2.9 per cent, increased faster than most people expected in May, while wages failed to keep pace. This, in turn, is impacting consumer sentiment and people's willingness to “splash on big ticket items.” (11:50)

The result of this is a weak set of retail numbers. “What was almost a retail boom in summer and early autumn last year has now fizzled [out].”(12:27)

That said, the UK economy remains fairly robust. “We're not the sickman of Europe at the moment… We're not growing as fast as we were but we're still growing. This economy has by no means fallen off a cliff and we're not expecting it to.” (15:12)

This economy has by no means fallen off a cliff and we're not expecting it to.

When will the pound bounce back?

The pound is likely hold steady until we get clarity around the timescale and outcome of the Brexit negotiations. “The sooner we get that the sooner the pound is likely to start rising… “ (21:24)

It is important to note, though, that “there is scope for volatility from unexpected events, whether good or bad … with any currency there are always two ends to the exchange rate.” In terms of the dollar exchange rate, for example, what is happening in the US is just as important as what is happening here in the UK, and changes at either end can cause currency volatility.

Businesses should of course keep their own risks at the forefront of their minds and prepare strategies to mitigate those risks, but also look for opportunities that they may be able to exploit. The weak pound, for example can provide a real boost for exporters.

View the webinar in full.

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