Now and Then

As we pass the two-year mark since the referendum, it feels like a good time to take stock of how the vote has affected our economy, and perhaps more interestingly, how this compares to a longer horizon. On the whole, the impacts have been minor – so far. Immediately following the vote, there was perhaps a naïve expectation that the world would change overnight; however, as time passes it becomes clearer that the impact will be drawn out over a much longer term. GDP growth is slowing, but the two-year average (1.65%) is not far behind the c.10-year growth rate since the last recession. The pound fell against the dollar (from $1.46 to a low of $1.20), but recovered to $1.33 just 4% down against its post financial crisis low (this actually beats the average rate of depreciation against the dollar of 1% pa assessed over the past 50 years). Both base rates (0.25% > 0.50%) and Treasury yields (0.73% > 1.29%) have risen slightly since the vote, but herein lies the starkest differential when assessed over a 10-year horizon. In 2008 the base rate was 5.00% (with Treasuries marginally higher). The dramatic post-GFC downshift has defined asset pricing over the subsequent 10 years. It could be easy to lose sight of the economic cycle in the context of Brexit. However, with a flattening US yield curve, tightening monetary policy and record valuations, the smarter discussion might be focused on the length of the global growth runway.