Concern is growing in some quarters that the UK economy could still hit the rocks. The markets are showing increasing turbulence and business optimism remains low in some sectors.
There is no doubt that uncertainty from both Brexit and the lack of political leadership are taking their toll. The impact of the decision to leave the European Union will likely ripple out to the rest of the global economy and will no doubt hit US business confidence.
Large US multinationals with operations and interests in the UK will be concerned about losing access to the EU market and any regulatory changes which will affect current and future contracts. In fact, last year, a report by the Center for Transatlantic Relations at John Hopkins University, commissioned by the American Chamber of Commerce, suggested that some 1.4 million jobs and almost $600 billion of US direct investment now rests on ‘uncertain transatlantic foundations’.
But the UK’s private businesses may provide an anchor for the rest of the British economy, and if they focus their attention on these companies, the situation does not seem quite so dire.
Public Market Turbulence Will Continue
Brexit is a serious threat to the markets. In fact, there have been many investors recently who have taken gambles against the performance of the UK. Encouraged by the pessimism of certain company bosses, EU politicians and commentators, investors have seen an opportunity to bet that the UK markets will tank post-Brexit.
While the FTSE has performed relatively strongly since Brexit, those companies that are most exposed to the UK and Europe have suffered the worse. Brexit jitters combined with US drops recently caused global companies in sectors including banking and oil to be hit hard, including HSBC, Barclays, BP and Royal Dutch Shell.
There are also negative trends in foreign direct investment. In 2017, FDI into the UK fell by a whopping 90%, albeit from record highs in 2016. But the picture is mixed. Chinese FDI into the UK doubled last year, growing from $9.2 billion to $20.8 billion. But whichever way one chooses to look at it, uncertainty about the outcome of the Brexit negotiations will continue to cause market turbulence and impact FDI.
In fact, there is a real case to be made for the UK equity markets struggling over the next few years. And the reasons are clear. The Japanese ambassador to Britain, Koji Tsuruoka, put it this way just last week:
“If there is no profitability of continuing operations in the UK – not Japanese only – no private company can continue operations. So it is as simple as that.”
Privately Owned Businesses Providing a Counter-Weight
However, too often the public markets are misread as a bellwether for the economy as a whole. Media headlines rarely distinguish between public companies and privately held businesses. The focus remains on quoted companies. But there is strong evidence that the performance of public markets and national economies are not tied as closely as people think.
That is especially true on markets like the FTSE, where the majority of the companies are international conglomerates with little, if any, direct exposure to the UK. If a large company, like miner BHP, suffers, there is not so much follow through to the national UK economy. Within reasonable parameters, despite this sounding contrarian, there is no absolute correlation between the buying and selling of shares in a company and the national economy.
Even sometimes huge stock market crashes don’t actually affect the underlying national economy. Take the stock market crash of 1987. Despite huge drops, it did not affect the real US economy to any significant degree; US GDP continued to rise.
That is because public businesses are not the whole economy – in fact, companies in private hands make up the majority of the UK economy, and their numbers are growing fast. According to the Department for Business, Industry, Energy and Strategy, at the start of 2017, there were a record 5.7 million private sector businesses in the UK, a rise of 197,000 since 2016, and 2.2 million more than in 2000.
These private companies are generally better able to weather political instability because they are not generally beholden to large outside investors who are constantly looking for quarterly returns. Unlike publically owned companies they have the flexibility and scope of view to think and plan long term.
In cases of short-term political instability, which is what Brexit is in the UK right now, private businesses can provide a calming influence – raising their vision, innovating and looking for growth beyond the next 5-10 years. One particular sub-set of private businesses that are good at doing this are family businesses. As Chris Gaffney, Finance Director of textile-business Johnstons of Elgin says:
“People sometimes say family businesses can struggle to reinvent themselves over time, but to survive successfully for over 200 years you have to reinvent yourself several times over.”
It is positive that the UK then has a number of large family businesses who should be expecting to provide this balancing influence; businesses such as Associated British Foods founded by W Garfield Weston in 1935; Laing O’Rourke founded by Ray O’Rourke who launched the business from his garage; Bestway Group created by Sir Anwar Pervez in 1956, and others such as Nisbets, the catering supplies business founded by Andrew Nisbet in 1983.
Financial Crisis as a Case Study
The 2007-2008 financial crisis provides a fantastic case in point for this argument. The crisis led to a crash in the public markets, with the FTSE 100 falling by 31.3%. However, the UK economy more generally, of course, did not fall by the same amount. That is because many private businesses assumed the load of the national economy on their shoulders.
There was a so-called ’employment miracle’, where the crisis did not lead to large-scale unemployment. In fact, employment increased over the next five years.
As the UK Government wrote in a report about the UK Labour Market in the aftermath of the crisis, “There certainly seems to be some truth that during the years immediately after the recession hit, UK firms held on to (‘hoarded’) employees amidst constrained demand, at the expense of measured productivity.”
This is exactly what will happen over the coming years too.
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