Brexit Breakdown: New Year, New Economy?

What is a conversation these days without Brexit? The Remoaners still champion their cause, but the Brexiteers boast Theresa May’s words of “Brexit means Brexit”. Then it was the remain camp’s time to boast following a temporary victory in the High Court regarding parliamentary procedure. If this was the 17th century again, one might fear another English civil war! Despite all of this, Britain looks to have grown the fastest of the G7 economies last year, with main thanks going to the services sector. A strong final reading in Purchasing Managers’ Index (PMI) – an indicator of the economic health of the manufacturing sector – suggests that the UK expanded by about 2.2% last year, beating the 1.9% estimate of the US. Accordingly, TCC looks at whether Brexit is having the dire effect that many of us expected.

Benefits of Brexit?

Following the result of the referendum in June 2016, the sterling saw one of its sharpest decreases for decades. Those advocating for remain suggested that this was the start of crisis,  the subsequent effects of which would cause chaos through our economy. However, in the wake of this result, the UK services sector experienced some of its best months – why? The fall in the sterling increased international demand, as those from abroad were able to purchase more than previously against their currency. Online retail purchases and quick getaway travelling where some of the main beneficiaries. This international demand had also led to the fastest rate of job creation in the services sector since April 2016. Increased jobs, increased purchases from abroad leading to a growing economy, what is so bad about Brexit?

Brexit Doom & Gloom

This fall in the sterling had its drawbacks; the first of which were beginning to protrude in the close of December and which will begin to intensify in 2017. A weaker pound affects imports, and the PMI found that the close of 2016 had seen the steepest rise in business costs for more than 5 years. As the pound drops, businesses have to pay more to purchase their materials from abroad so as to manufacture their products. The result is that these businesses have to pass these increased costs onto the consumers in the form of higher prices for their products.

The Office for National Statistics (ONS) revealed that the Consumer Prices Index, a measure of the average prices consumers are paying for a certain basket of goods, shows inflation beginning to creep up and this will undoubtedly continue into the new year. In November, the Bank of England forecast that inflation would surge to about 2.8% by mid-2018. No doubt that the decision of OPEC to curtail its oil output which saw a rise in the price of Brent Crude will exacerbate this further. As businesses are paying more for oil, affecting their transport and manufacturing costs, this again will be passed onto the consumer. Mark Carney, Governor of the Bank of England, noted that as inflation will typically rise at a faster rate than wage increases, the cost of living will rise; meaning households will have to start tightening their budgets.

 Who Will Be Our Saviour?

What can be done about inflation increase? One option is for the Bank of England to raise interest rates. By raising rates, this encourages people to keep their money in the bank seeing as they accumulate more interest on their savings. Additionally, the cost of borrowing money increases. As a result, with people spending less money on products and services, inflation reduces. The problem – with people spending less money, economy growth declines; one of the key concerns of the government in the wake of Brexit.

There is only so much the Bank can do, however. With Mr Carney calling for the government to recognise the disproportionate distribution of trade and technology in globalisation, and the need for the state to offset these for the poor that suffer most.

Political Uncertainty

The political disputes surrounding Brexit are endless. Our indecisive Prime Minister faces difficulties from all angles. She must await the judgment of the Supreme Court in January as to whether her government can begin the Brexit strategy without the concern of Parliament. Furthermore, she faces a strict stance from the EU, stating that negotiations for any trade deals between Britain and the EU will have to wait until the UK has left the Union; talks will not take place in parallel. Additionally, this hard stance translates into a firm approach against cherry picking – meaning that the UK will be hard placed to establish access to the single market without making concessions on immigration. No wonder Theresa looks as though she hasn’t slept since she took office.

All of this political uncertainty undermines business sentiment. Investors hate uncertainty, and as the process drags on and indecisiveness in strategy worsens, they may wish to move their money somewhere more stable. The Bank of England has warned of escalating inflation if foreign investors desert the country over fears about the economy’s long-term potential after Brexit. A sharp outflow of foreign capital would be associated with higher funding costs for borrowers and further depreciation in the sterling. I’m sure this will be avoided, however, seeing as politicians always make their policies clear – hmm.

So, I mean, Brexit didn’t throw up that many problems, right?

 

By Dre Efthymiou

 

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