Rolling uncertainty

In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing’. This statement by Teddy Roosevelt highlights the danger of inaction. Within the readership of this blog are people with strongly held views on both sides of Brexit, but I am yet to find those who favour continued uncertainty. In a recent speech, Monetary Policy Committee member Michael Saunders expressed this point with clarity. Only 12% of firms believe that we will achieve a clear path on Brexit this year. The mean timeframe in which firms believe that this will happen has remained constant since the referendum vote – always 4 quarters hence. The point that Saunders makes is that if firms have confidence that it would take a long time to resolve this position, they would get on with things. It is the rolling short term uncertainty that is particularly damaging. The response of most businesses has been to adopt indefinite defensive strategies (reducing leverage, controlling costs and disposing of assets) in place of expansive strategies (acquisitions, product launches and innovation spending). The consequence is a lack of investment, amplified by a self-fulfilling feedback loop (no investment > no growth > weaker figures > more defensive strategy > no investment), the results of which are now being felt in the UK macro data. Whilst most firms are concerned about the downside uncertainty of the ultimate Brexit outcome, for the time being it is the uncertainty itself which is the most damaging.