Economic Nuclear Winter?

 

It’s fair to say that the first half of 2016 has been a rollercoaster for investment markets. An oil price crash, China being China, the U.K.'s vote to leave the European Union and weaker than expected corporate earnings results across the region has created a cocktail of uncertainty for the second half of the year.

 

Whilst our focus will be on the new Government at Westminster, the economic stimulus action they take (or not) and their plans for firing the brexit gun, perhaps our attention would be better focused on the banking sector as our ‘yard stick’.

 

You see the banks are a bigger deal in many ways than the Government as they only have tax and spending cuts to play with in reality. Whereas the banking sector is the oil that keeps the economy turning by providing the cash for businesses to survive and thrive, provide consumers with money they don’t have so they will still spend (we are a consumer driven economy after all) and they account for £1 in every £10 made in the UK as a whole. The banking sector is a big deal.

 

So rather than focus on Westminster for a guide on the direction of travel over the next 6 – 9 months, it is the banking sector that perhaps gives us the best clues……and it is fair to say UK and European banks are preparing for the worst and a very tough six months ahead. 

 

The current uncertainty over when the U.K. will start the process of quitting the EU has banks on tenterhooks as most banks are multi-national with operations across the UK and Europe. Banks are now preparing for an economic nuclear winter and have strategies in place that take into account the worst case scenario that could happen by the end of this year.

 

What does worst case look like? A hardy mix of Article 50 being triggered, referendums in other European countries leading to a break-up of the Euro and Sterling plummeting further against the Dollar.

 

All scary stuff but there is a balancing argument that really should be considered……Brexit could be organised, orderly and with all parties happy with the terms, referendums in other EU countries can take years to organise and Sterling may hold up well against the Dollar as a consequence.  

 

Time will tell……the one thing for sure is that there are uncertain times ahead as we are in unchartered waters.