Dickie Hodges: There will be nothing ‘soft’ about Brexit

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Fund manager Dickie Hodges says Brexit will have a material cost for the UK economy regardless of whether it’s ‘soft’ or ‘hard’ as inflation bites, wages stall and the Bank of England is forced to sit on its hands.

The UK and European Union begin divorce talks in Brussels today, but Nomura’s head of unconstrained fixed income warns it will be impossible to to negotiate all the agreements necessary within 18 months. It is estimated there are upwards of 7,000 issues to resolve before trade talks begin.

Unless an agreement for an extension is reached, the UK will exit the EU in March 2019, two years after Theresa May triggered Article 50; however, negotiations will have to finish earlier than this to allow governments to ratify any deal.

“Even if it’s a soft Brexit the cost to the UK is going to be material. If it’s a hard Brexit then you really do have more of a material impact to UK growth,” says Hodges, who manages the Nomura Global Dynamic Bond fund.

Brexit forecasts have softened following the UK’s shock general election result, where the Conservatives lost their majority against expectations that they would beat Jeremy Corbyn’s Labour in a landslide.

“The UK is a real problem,” Hodges says. “The pound fell on a hard Brexit bias and is now falling on soft Brexit bias and expectations. It doesn’t bode well for the pound to go up under any Brexit scenario. Under that scenario you have subdued wage inflation, and you’ve got more jobs uncertainty.

“You’ve got a central bank that can’t react, because it can’t put up interest rates, it can’t really cut interest rates, because of the level of inflation. I fully expect inflation to hit 3.3 per cent and be more persistent on that for the time being. That means less disposable income and the economy slows.”

Brexiteers who until recently have been pointing to the resilience of the UK economy fail to acknowledge that nothing has changed and the UK is still part of the EU, says Hodges.

“It only looks better because the pound has fallen so from a exporters’ perspective it’s a much more attractive place. We’ve benefited from this fall in the pound and we’re still in the EU and we’re still trading. If that changes more materially then we have a real problem.”

First quarter UK GDP growth was 0.2 per cent, the lowest in the G7, while rising inflation, which hit 2.9 per cent in May, has seen real wages fall 1.5 per cent.

Hodges expects new lows in the pound versus the US dollar, possibly reaching $1.20 in the short to medium term.

“The pound will recover over the course of the next two to three years, but you’re not going to see a material return to $1.45 levels. You’re not going to see that for a very long period of time. There’s not many things to be encouraged about.”