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Brexit Knocks Confidence But the Sky Hasn't Fallen

Mark Gilbert is a Bloomberg View columnist and writes editorials on economics, finance and politics. He was London bureau chief for Bloomberg News and is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”
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A month has passed since the U.K. voted to leave the European Union. While that's nowhere near long enough for all of the economic aftershocks of Brexit to fully manifest, the evidence thus far suggests grounds for optimism.

QuickTake Brexit

The FTSE 100 Index of the biggest U.K. companies, which dropped 3.15 percent on the day after the referendum, is now almost 6 percent higher. The government's 10-year cost of borrowing in the bond market has dropped to 0.8 percent from almost 1.4 percent right before the vote. Both stocks and bonds are arguably comforted by the prospect of Bank of England rate cuts; but even the pound, crushed from a value of almost $1.50 prior to the results, has stabilized at a bit more than $1.30, and has barely budged in the past four weeks:

At the opposite end of the financial liquidity spectrum is the U.K. real estate market. Here, the picture is a bit more mixed, though still not the disaster it threatened to become as investors raced to pull money out of property funds in the days immediately after the plebiscite.

Helical Bar, a U.K. property company, said on Monday that post-vote activity has been "encouraging" despite "some uncertainty." Swedish construction company Skanska AB said this week that private developers who put investments on ice before the vote are still cautious, but none have canceled ongoing projects. And while Aberdeen Asset Management accepted a 15 percent price cut to sell an Oxford Street building in a fire sale after Brexit forced it to suspend trading in one of its funds, British Land was able to complete a similar transaction on the same street at about the same time but without offering a discount.

Wells Fargo is going ahead with plans to spend about 300 million pounds on a new London headquarters. The U.S. bank currently employs about 850 people in London; it says it will occupy all of the new building, which can house about 2,600 workers and is scheduled for completion in the third quarter of next year. If a bank with a market capitalization of $245 billion trebles its City workforce, that's quite a vote of confidence in the financial capital's post-Brexit future. With the cost of moving a financial staff member abroad coming in at about 50,000 pounds per chair, according to consulting firm Synechron, maybe the feared stampede of departing bankers won't materialize.

There are other cheering anecdotes available for those who want to believe in a half-full post-Brexit glass. An Ipsos Mori poll published Saturday showed one in 10 Britons either delaying or scrapping "big" spending decisions; but 57 percent said they foresee no change in their financial situation in the coming six months.

Brexit has been trotted out to explain various ills, some only very tangentially linked. The causal chain between the U.K. opting to quit the EU and Italy realizing its banks are broken, for example -- as Italian finance minister Pier Carlo Padoan argued on July 14 -- is tenuous at best. Germany’s chemical and pharmaceutical lobby group, VCI, predicts a slowdown in sales means production growth will halve this year to just 0.5 percent; even if that turns out to be true, blaming Brexit for the downturn seems a bit of a stretch.

None of this is to say that Brexit hasn't done damage to confidence or foiled some plans. U.K. manufacturing confidence is at its lowest since the last recession, according to a survey this week from the Confederation of British Industry. Service and manufacturing businesses reported activity in the weeks following Brexit shrank at its fastest pace since the previous recession seven years ago, according to a survey published by Markit Economics last week. But a similar German survey taken by Markit between July 12 and July 21 showed activity there at its highest level for the year.

Given the current post-Brexit climate of uncertainty, it seems likely that business managers filling in surveys are likely to be accentuating the negative. It's also likely that the economists at the International Monetary Fund and its peers are also erring on the side of caution as they downgrade their global growth forecasts. But while the outlook remains cloudy and will stay that way for a while, the sky hasn't fallen in.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mark Gilbert at magilbert@bloomberg.net

To contact the editor responsible for this story:
Therese Raphael at traphael4@bloomberg.net