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Brexit: mind the trade gap
3 July 2018
Highbury and Islington Station is packed, and hotter than hell. The TfL guard yells “mind the gap” and it gets me thinking about the briefing and lunch I attended at the Bank of England yesterday.
Britain has trade deficit of roughly 5% of the economy, which means we import more than we export. To fund this “gap” we need to borrow from overseas.
The UK has a large stock of assets owned by overseas investors, about four times the value of the UK economy. Eek… we also hold investments in overseas assets of roughly the same amount. Pweh.
But this makes us vulnerable to the flow of money around the international system.
About a third of overseas interests in the UK economy are in direct investments, for example foreign investors placing funds in UK deposits. But this money can be flighty, meaning if investors get spooked they might start withdrawing funds.
A disruptive Brexit has the potential to cause investor flight, and markets appear to be underestimating the risks.
Bloomberg have been reporting for a while that the markets still don’t attach a high probability to a complete breakdown in UK-EU talks.
And, trading in Sterling seems to indicate that investors are expecting Brexit to be delayed or called off.
The Bank of England is confident that our banking system is resilient to a disorderly Brexit. There has been a major improvement in loss absorbency by the banks since the 2009 crisis.
Let’s hope we don’t have to put it to the test.
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