Brexometer for FP&A Professionals
Last month we discussed what the Brexometer is, how it works, and what it is made up of. You will see below the latest reading for the month of November and the impact that Brexit is having on the otherwise robust British economy.
Many businesses are seeking to evaluate the factors that would influence the decision making around moving into or out of the UK, for HO activity or just specific functions. The factors embrace matters such as skills base, tax, environment, ease of doing business and access to markets. We see the Brexometer and the AAX (Accountagility Index) as a key factor that should be added into the mix.
The Brexometer period is June 2016 to date, so a relatively short period, but one with enormous significance. Data is gathered from 24 measures taken from independent and official sources such as the ONS, Bank of England, IMF, LSE and many other reference points. This data relates, but is not limited to areas of:
- UK economic growth
- UK inflation
- Sterling strength
- Debt ratio
- Foreign Direct Investment
- Political stability
- Progress of Brexit negotiations
- Progress on international trade talks
We do have monthly data for each of the 24 measures that are used, and a monthly score (out of ten) for each as well.
Please contact me if you would like to use some of this data and incorporate it into your scenario planning. Some practical ideas about how you can use the Brexometer information to inform your thinking, improve the breadth of your scenario analysis, and guide the business in its decision making, are listed here:
- Model a no-deal Brexit scenario where the uncertain outlook over the period 2018 to mid-2020 causes a reduction in UK confidence, markets and GDP, which in turn infects the weakened Euro zone and sucks all the growth out of it. Since there are always economic counter-weights, there would be upsides in terms of currencies, government stimuli, international trade talks and general investment opportunities. Such a scenario would attract a weighting of between 20 and 40%, as at the middle of November 2018.
- Model a positive Brexit outcome where the UK stays in the Customs Union indefinitely. Assume the backstop is not well defined and does not get cancelled until late 2022. There is an immediate boost to confidence in the UK and an upward blip in business investment. There is also a stimulus to the Eurozone which does not slide into recession, and props up Italy. Domestic demand in the UK feeds through to retail and manufacturing sectors, which see positive growth, as does UK GDP. The weighting for this scenario, as at the beginning of November 2018, may be assessed in the range of 30-50%
- There would be others scenarios which fall between these above two extremes, which would attract lower levels of weighting (amounting to a total of around 30% probability). These may be modelled if your business shows high exposure and sensitivity to either of the above two scenarios.
The BREXIT Curse: May you live in historic times
On the cusp of a dream or the edge of the cliff?
With all the heavy pressure and the storm of opinion and commentary surrounding Brexit, it’s easy to overlook the most important point; we are living through history right now. What happens in the next few weeks will affect the UK and Europe for at least a generation to come. Much of what will be decided will not be simple to unravel. We can’t savour this moment in time though, because we are right in the eye of this storm.
An Index can’t solve these problems but it can shed a clear light on affairs, and help us to understand the bigger picture. We hope that the Brexometer gives you a dispassionate and elevated viewpoint on events.
We have now seen the details of the deal with the EU, and there is a lot of negotiating activity, but we seem to be a long way off an outcome. Whilst this painful uncertainty continues, we are stuck in the Brexit waiting room, nervously awaiting the results of the tests.
In such a state of limbo it is no real surprise that the UK suffered a setback in November, with the Brexometer showing a reading of 5.12. This is a fall of thirteen basis points from the October score of 5.25, which is one of the larger monthly movements in the Index since inception. Whilst this November score of the Accountagility Index (AAX) is in positive territory (any score above 5.00 is positive), it is below the pre-Brexit benchmark of 5.18, and miles short of the record high of 5.43 seen in July. The Index records UK political and economic health on a score out of ten.
The Brexometer was calculated during the first full week in November.
What caused the fall this month?
The most substantial contributor to the downward change was the further fall in the UK market indices, but there was also a sharp drop in confidence in both the Services and Manufacturing sectors, and increasing political concerns. The only positives in October were the improvement in the inflation numbers and some increase in business activity in the Construction sector, mainly due to expansion in civil engineering. Bear in mind that most of the figures that shape the Index were released before the Budget, which would be expected to have a positive impact.
What happens next?
The further uncertainty will see the Brexometer slide back towards a neutral territory. Another question is emerging too… headwinds in the global economy are becoming stronger. Behind the large screen of the Brexit movie, will the cumulative effect of trade wars, the worldwide slowdown and tightening market liquidity heave into view, with negative consequences?
Living through historic times makes for stress and turmoil, but at least it’s not boring.
Over the coming days, will the Brexit deal get through Parliament? Will Theresa survive? Will there be a new leader? And how will this impact the Index?
Keep following the Brexometer to find out.