by Roger Martin-Fagg


This update is the most difficult I have ever written. It is extremely difficult to maintain objectivity and gain a sense of what is the most likely path for the UK economy over the next few years.

The vote and its fall out to date is certainly a Black Swan event which is defined as:

An event or occurrence that deviates beyond what is normally expected of a situation and that would be extremely difficult to predict.

I think we should expect quite a few of these over the next months and years. They will originate in the USA, China, and the EU. And underlying this we have the inexorable march of innovation and aging populations.

More than ever before business owners, managers and employees must be clear and confident about the behaviours which make their business distinctive and compelling. My advice is to make sure this is fully understood before beginning to assess the impact of the external environment. And for so many SME’s market share is so small, the wider economy has virtually no impact except perhaps on confidence of the owner.

I am splitting this Update into three sections. The first looks from now until the end of the year, the second from the end of the year until the letter is sent to the EU and the third beyond this. It is all guesswork.

The Outlook until the end of the Year

I think it is fair to say that the decision of the electorate was a shock. The UK Treasury had no plan B, but the Bank of England clearly were prepared. Most City institutions and the EU as a whole did not expect the result.

The data we have to date suggests that the consumer has held off spending, and the survey by GFK shows the biggest drop in confidence for 21 years. It is likely that this is temporary and as the dust settles consumer confidence will return in the Autumn. The impact of a weaker pound will not have come through in price increases ( apart from fuel and fresh food from Spain), the Bank of England will not raise interest rates, and unemployment will not be rising. I doubt too if house prices will stop rising. The rate of increase will slow, but there will be no overall drop.

We are still a member of the EU with full access, paying our subscription and receiving our agricultural support, regional fund, and joint research payments. And the EU is beginning to grow again although our vote is a shock to them too.

As and when Parliament approves the sending of the letter to quit there will be a two year transition phase. It is not clear if the UK will be allowed to begin bilateral talks with EU member states during this period. It also not clear if existing trade agreements will remain in place. But it is likely based on mutual self interest that a sensible arrangement will be made.

From the time the letter is sent until the EU agree the terms of our departure: assume 2017-2020

This is the period in which the uncertainty risks become magnified. Hopefully Prime Minister May will early on indicate the type of deal she would wish to obtain. This will require clarity on the control of immigration issue. If she sets points based control of EU migrants to the UK as non-negotiable then currently it is unlikely she will be able to obtain either a Norwegian or a Swiss option.

This leaves a WTO based option. To date very few WTO deals are bilateral, they prefer unilateral agreements. So it would have to be a deal with the collective EU, rather than individual members.

This will take many years to obtain. Meanwhile the UK has a significant current account trade deficit to finance. If there is a risk to our growth this is where it will originate.


The balance of payments are a set of accounts which measure all transactions between people resident in the UK and others. The method is double entry, so every month the accounts must balance. A country has a problem when we observe how the balance is achieved.

A deficit on the trading account must be balanced by a surplus of equal size on the capital account. Since 1984 we have achieved balance by running surplus on longterm capital inflows. These are set up when a company based overseas decides to buy a UK business, or set up in the UK. The bulk of investment comes from firms in EU member countries and the USA. EU business see the UK as the least regulated member of the EU and given the flexibility of our labour force an easier place in which to make profits.

I do not know what EU and US firms will do, but if they reduce their investment flow, we will have to finance our deficit using short term capital. This is very volatile and consists of global liquidity which moves between financial centres in search of the best return. It is either cash, and/or the purchase of bonds and equities. To be more attractive than Frankfurt, or Paris, or New York, or Tokyo the UK needs a cheaper currency and/or higher interest rates.

Assume we decide the cheaper currency is the best way( the Bank of England does not raise interest rates). Then as the pound falls in value, so with a time lag domestic prices rise. As a rough guide every 10% fall puts 1% on inflation within a year. Assuming the Government doesn’t raise the inflation target ( currently 2%) then the Bank of England must increase interest rates.

The combination of higher inflation and higher interest rates will reduce real income growth from the current 2% pa, to zero or minus 2%. This and falling house prices is where the recession begins.When ?


Difficult to say, but I guess 2019.

Could we avoid this?

Unbound from the EU we could cut VAT to 10%, which would to some extent preserve real incomes. But to reduce the impact on the budget deficit the Government would have to freeze pensions for a few years ( the Daily Mail will not like that!).

The Government could get the Bank of England to buy the debt with more QE, but that would make us look a bit like Zimbabwe.

The Government could slash all capital spend which would further depress demand.

Or it could raise the money from overseas by ensuring that the currency stays weak and interest rates competitive.

We of course will not be paying 14Bn to Europe, but with interest on the national debt running currently at £48Bn, and in recession debt rising by around 110Bn each year, a good deal of this will be swallowed up in interest payments.

However if by 2019 it becomes clear that the EU is willing to do a deal which gives the UK market access and allows us to limit immigration then the long term investment will continue to flow in and there will be no recession.

Looking beyond 2022

The World will look quite different. The UK will either have engaged a Dunkirk spirit with thousands of entrepreneurs scouring the world for business ( they will be flying out of Dublin because Heathrow will still have the same capacity, and Dublin will have built its third runway.) It is likely a lot of financial institutions will have set up in Dublin to get passporting rights to the EU financial services market too.

Or unable to secure trade deals with the EU and major economies we become a low growth, low opportunity country with our young bright people moving to other countries with more opportunity. Our steadily aging population slip into sullen compliance, put up with Japanese style low growth, and live by the maxim, musn’t grumble. Even though the resources going in to the NHS and elderly care are insufficient.

I think the above is unlikely.

I have reproduced below from a web site called Just Landed, their description of the British for visitors. It is not sponsored by the Government.

The British enjoy superb entertainment, leisure, sports and cultural facilities, which for their sheer variety and accessibility are among the best in the world (but increasingly expensive). The quality and huge choice of goods in the shops is excellent and explains why many people travel from far and wide simply to shop in Britain. British television has no equal, national and local radio is excellent, and the country has an unrivalled choice of quality newspapers, magazines and literature.

The UK is a caring society, highlighted by the abundance of charitable and voluntary organisations, unparalleled in any other country, all of which do invaluable work (nationally and internationally).

The UK remains a centre of scientific excellence underlined by its number of Nobel prize-winners. It’s also one of the least corrupt and most civilised countries in the world.

The British have more freedom from government interference than the people of most countries to do, say and act any way they like, something most of them take for granted.

The UK is still a great enlightened power (if a little frayed at the edges) and a positive influence in the world and London remains the centre of the English-speaking world. Whatever else it may be, life in the UK is spiritually, mentally and intellectually stimulating and rarely dull. Although foreigners may occasionally complain about Britain and the British weather, most feel they’re privileged to live there and wouldn’t dream of leaving.

Last, but certainly not least, there are the British people, who, although they can be infuriating at times, will charm and delight you with their sense of humour and idiosyncrasies. When your patience with the UK and the British is stretched to breaking point, simply take yourself off to the nearest pub and order a pint of ale or a large gin and tonic: the UK looks an even nicer place through the bottom of a (rose-tinted) glass, and, with a bit of luck, you won’t even notice that it’s still raining.

Finally what should you do if you are running a business in the UK?

  1. Ensure you are clear on the market position you wish to occupy.
  2. In your chosen segment make every effort to ensure you are distinctive and compelling so that you can enjoy a quasi monopoly position and be a price maker as opposed to a price taker.
  3. Employ the best and pay the best.
  4. Do not sacrifice the long term for short term gain
  5. Communicate, listen, communicate, listen to suppliers, employees and customers
  6. Ignore the doom mongers ( particularly economists!)
  7. Only worry about the things you can fix
  8. Assume you will be working longer than planned so get fit/ keep fit
  9. Always remember your employees watch for non verbal signs, make sure your body language fits your words
  10. And finally be the change you want to see in the World

I have just heard our new PM speak on the steps of No 10. We are off to a very good start.

Exchange rates next 12-18 months if options are announced

Norway/Swiss option    WTO option

$-£ 1.20-1.35                          $-£   1.15-1.25

€-£ 1.10-1.20                          €-£   1.05-1.10

Interest rate: 0.5%                Interest rate: 0.5%

Real GDP: 1.7%                      Real GDP 1%

July 11 2016

Roger Martin-Fagg
Roger Martin-Fagg is an economist turned strategist.

A behavioural economist who focuses on behaviour and feedback loops which are largely absent from conventional models.

He began his career in the New Zealand Treasury, then moved into Airline Business Planning and teaching postgraduates all aspects of economics. He designed and ran the postgraduate diploma in Airline Management for British Airways before joining Henley Management College in 1987, where for 21 years he taught senior managers macroeconomics and strategy.

Roger is an independent teaching consultant. He has been external examiner to Bath University, worked with the Bank of England, three of the major UK clearing banks, advised a major London recording studio for 15 years, and regularly talks to SME owners in the UK and Europe about economic trends. He is a visiting fellow to Ashridge, Warwick and Henley business schools.

Roger is a practical researcher. He focuses on how the economy really works and on the links between FT100 reward systems, the behaviour of banks and economic instability. He also researches his clients trading environment as a necessary component of his teaching. His book

“Making Sense of the Economy” is in its fourth reprint.

He speaks at conferences around the world on the economic outlook and its impact on business. His quarterly Economic Update is sent to 1,200 SMEs.

Follow our social channels here: