Brexit and political turmoil costing the UK billions as investors turn away

Pedro Goncalves
·Finance Reporter, Yahoo Finance UK
Wed, 8 February 2023 

Britain's prime minister Rishi Sunak: The boss of insurance giant Lloyd's of London said that the government needed to restore economic stability following Brexit. Photo:Oli Scarff/Pool/Reuters

Investors are keeping their distance from the UK as Brexit and the revolving door at Downing Street that saw three prime ministers in 2022 dealt a heavy blow to the country’s reputation for financial stability.

The boss of insurance giant Lloyd's of London told the BBC that the UK should not take its position as a global financial centre for granted and that the government needs to restore economic stability.

"We're at an important moment. We've really got to re-prove our value proposition, I think there's a responsibility on government and us in business to get it right.

"I think we can get it right but we have got to work hard," John Neal said.

The latest dent in the UK's reputation for economic stability happened when Liz Truss blew up her own government with a package of unfunded tax cuts and energy-price guarantees.

Markets responded to her announcement with suspicion and fear. Yields on UK gilts shot up by more than 3%, the biggest selloff since March 2020, when the news of the COVID lockdown first broke and the pound fell to its lowest level against the dollar since 1985.

Read more: UK pay for new hires climbs at the slowest pace in almost two years

Higher borrowing costs for the government fed through into rising mortgage rates with hundreds of products withdrawn from the mortgage market.

Deutsche Bank at the time said that investor confidence on the UK economy could no longer be taken for granted.

“If investor confidence erodes further, this dynamic could become a self-fulfilling balance of payments crisis whereby foreigners would refuse to fund the UK external deficit.”

The BoE described the speed and scale of movements in interest rates on UK government bonds as "unprecedented". It had to step in to safeguard the pensions sector with a support scheme – worth a potential £65bn.

But Liz Truss, whose premiership lasted roughly the shelf-life of a lettuce, wasn’t alone in hurting the reputation of the UK as a place to do business.

Neal said other factors that harmed the UK's reputation included having three prime ministers and four chancellors in 2022 as well as the extra costs associated with Brexit.

"All of them don't help us because I think we had huge credibility around stability and certainty," he said. "And I think what we need to do through 2023 and 2024 is begin to rebuild that stability."

Brexit has caused a £100bn-a-year loss in output, leaving Britain’s economy 4% smaller than it would have been inside the bloc, according to according to Bloomberg Economics.

Since officially leaving the European Union, three-years ago this week, UK-based investment has grown 19% less than the G7 average and the economy has forfeited 4% worth of growth, the analysis showed.

Read more: Brexit: Over 7,000 finance jobs traded London for EU

Despite the dents in the UK’s financial stability armour, the Lloyds of London boss believes the government can recover its credibility.

"We're at an important moment. We've really got to re-prove our value proposition, I think there's a responsibility on government and us in business to get it right.

"I think we can get it right but we have got to work hard," Neal said.

Lloyd's of London is the world's largest insurance market, providing specialist insurance services to businesses in over 200 countries and territories.