| Danial Norjidi |
THE economic implications of Brexit were highlighted in one of the presentations at the recent 12th Annual Brunei Darussalam Roundtable.
Held in September, the event featured a number of invited speakers, including Tay Soo How, a Senior Portfolio Specialist from Pioneer Investments. Based in Singapore, Soo How has more than 25 years’ experience in the industry as a portfolio manager, economist/sovereign analyst and asset allocator.
In his presentation, he spoke on the main economic implications of Brexit, stating that, after Brexit, risk is on the rise.
“The risk of a LowLow trap (low growth, low inflation and political paralysis) has risen after Brexit, as well as the risk of further shocks,” he said. “The world economy can still pursue quality growth but a strong policy commitment, beyond Central Banks’ short-term support, is needed.”
He noted that the growth outlook is now even more fragile. “The impact of Brexit on the global economy will start to materialise in 2016, but will become more material in 2017.”
“Eurozone and UK are the hardest hit, while EM and US should remain relatively resilient,” he continued. “Under the different scenarios, growth forecasts change materially.”
Tay Soo How then went on to state in his presentation that global trade has been directly impacted by Brexit.
“Global trade is one of the main transmission channels of the shock and is already showing a weak trend,” he said, noting that the US and Germany are the main trading partners for the UK. German exports of goods to UK as a percentage of GDP are about three per cent, while for the US the percentage is about one per cent of GDP, he said.
He asserted the need to watch the impact on confidence, saying, “Another impact of the shock is on confidence, which may influence consumer spending. In Europe, consumption has been relatively well sustained in the first part of the year, but we are now seeing early signals of deterioration.”
Tay Soo How’s presentation stated that investment growth, already subdued, is expected to weaken further.
Tay Soo How delivering his presentation. – DANIAL NORJIDI
“Business confidence also affects investment decisions. Investment growth has barely recovered from pre-crisis levels, with the exception of the US,” he highlighted. “Low investment growth is one of the reasons of weak productivity growth and low growth potential.”
His presentation also mentioned “deflationary forces”, stating, “We see inflation expectations falling further. Deflationary risks are higher in the Eurozone and Japan, as a consequence of falling demand and weaker economic conditions.”
He also touched on the role of Central Banks, sharing, “In our view, Central Banks will continue to provide liquidity to the system and support adjustments after the Brexit shock. Further measures are expected.”
On who has the most to lose from Brexit, he said, “The spillover of Brexit is expected to be widespread in Europe. Spillover can be through the financial sector, trade, foreign direct investments and migration flows.”
Brexit poses further threat to the EU financial sector, he said. “In our view, the market is currently testing the ability of EU institutions to find a solution for the banking sector that goes beyond country-specific interest to the need for capital increases for some banks.”
In addition, he noted that the Banking Sector is “still not working properly”, noting, “The EU banking system is under the burden of Non-Performing Loans. Lending activity to households and non-financial corporations is still weak and well below pre-crisis levels. This element, combined with ultra-low interest rates, puts profitability under pressure.”
He noted, however, “We believe we are not in a new ‘Lehman Scenario’.”
“European Banks are operating today on stronger foundations than before the Great Financial Crisis and we do not believe they represent a global systemic risk,” he added in his presentation.
“Funding structures have become more balanced and financial leverage is not such a significant issue for European banks as it was for US banks during the Lehman crisis.”
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