This week, I’ll take a break from the Fireweed Party series to report from London on what Brexit means for the Yukon.
Everyone in London is talking about Brexit. The capital voted to remain in the EU by a 60-40 margin. I spoke to an unscientific sample of bankers, lawyers and journalists. All thought the vote was a disaster for Britain.
These are exactly the kind of London experts that Brexit populists railed against during the campaign. Feelings were so strong on the topic that the English soccer team’s humiliation by Iceland at Euro 2016 a few days later barely came up during my conversations.
The experts I spoke to were less quick to say what it meant for the Yukon.
The most obvious transmission mechanism for Brexit to reach the Yukon economy is the gold price. Gold surged more than US$50 per ounce after the Brexit vote, and has since gone even higher. At the time of writing, it was US$1370, near a two-year high. And not only did the gold price go up, there was also evidence of nervous retail investors increasing their physical holdings of the precious metal to hedge themselves against bad economic news.
This is good for the Yukon mining sector. No one knows what gold will do next of course, and market observers seem highly uncertain about how Brexit will play out. Uncertainty is good for gold.
However, we have to keep this in perspective. Gold is only about 10 per cent higher than before the Brexit vote, and still significantly lower than it was as recently as 2013. Recent surges will give a boost to placer mining but are unlikely to be a game changer for many bigger mining projects unless gold prices look like staying higher for the medium term.
The second transmission mechanism is interest rates. Brexit is expected to add to uncertainties over global economic growth, and reduce upward pressure on inflation. Reuters reported that the New York Federal Reserve chief said after the Brexit vote that the Fed can be “patient” in raising interest rates.
While Canada has an independent monetary policy, we can expect similar effects on our country. Continued lower interest rates will be good for borrowers from businesses to mortgage-holders, and bad for savers. The latter category includes people saving for retirement, First Nations with large land-claims endowments, and even the Yukon government with its cash surplus.
This effect seldom gets much attention, but is actually quite large. Consider a back-of-the envelope calculation assuming the Yukon has 5,000 houses with an average mortgage of $200,000. A one percent difference in interest rates means $10 million a year staying in Yukon home-owner pockets rather than going to the bank.
On the other hand, I have been told that the total investments of Yukon First Nations are in the $300 million range. A one-per cent impact for these investments is $3 million a year.
The third potential impact is the largest, but also the most nebulous. There are now fears that Brexit could be the event that triggers an unraveling of the European Union, provoking a rise in nationalist spasms that threaten the liberal international order of the last sixty years. Anti-Europe politicians in France are called for “Frexit” and may do well in the next election. The Italian banking sector is teetering. And the multiple European crises continue to smolder, from refugees to the after-effects of the global financial crisis.
A rise in protectionism restricting movement of trade, people and capital could slow down economic growth and make it more difficult for many countries to deal with some big problems rapidly approaching. Countries have to manage the expenses of aging populations, generate capital to invest in carbon-free energy as well as the long-standing challenges around health care, education, poverty and social inclusion.
It is far too early to tell how this will turn out. The authors of the Smoot-Hawley tariff bill in 1930, which you may recall from the hilariously boring economics teacher in Ferris Bueller’s Day Off, probably didn’t think they would go down in high school history books as having sparked an international trade war that made the Great Depression far worse and contributed to the economic instability that helped cause the Second World War.
In defence of the London experts mentioned above, it’s worth pointing out that at the time of Smoot-Hawley there were plenty of experts who predicted it would be a disaster and were scorned for their pessimism.
One of the few things I can say for sure is that the British pound has crashed to a thirty-year low against the US dollar. Visiting London and debating economics over a pint of Samuel Smith’s Old Brewery Bitter is cheaper than it has been for years.
Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He won last year’s Ma Murray award for best columnist. You can follow him on Channel 9’s “Yukonomist” show.