To sink or not to sink, that is the question

Brexit won after the June’s referendum in 2016. The expected effects were important, especially for the British economy. As 2017 begins, it is time to take stock of these last months and to analyse the figures for the new year.

Last week, official figures revealed that the British economy remained resilient in spite of the vote in favour of Brexit. Economic forecasters said that the British economy would collapse, but it did not: in the three months following the referendum, the GDP grew by 0.6% and by 0.5% in the last quarter of 2016. The main reason happens to be the consumer spending. As Chris Hare, economist at the bank Investec, said: “households have largely shrugged off the political and economic uncertainties” due to Brexit. Consumption helped the economy, as the construction, manufacturing and services sectors did, which all grew at the end of 2016. Brexit has not been so hard, or at least not as some economists predicted at the time of the referendum.

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However, economists warn Britain is headed for an important slowdown this year. Different reasons may explain this decline. First, inflation is expected to rise further, so consumption will be less supportive. Households may not be able to maintain their support to the economy. Price rises already affected consumption in December: it was the sharpest drop for more than four years for sales volumes. Furthermore, the weak pound will continue to increase the cost of imports, which will also squeeze the spending power of consumers, which means households but also firms which import to produce. We also have to add Brexit. Phillip Inman  remarked that this vote has not been so hard so far, but labour market and tax receipt data have started to show a decline. Because of unemployment and inflation, incomes will stagnate or decrease for the two following years. Brexit has also impacted and will continue to influence business confidence.

The Confederation of British Industry survey revealed that the optimism of the financial services industry has declined for the fourth successive quarter. 45% of respondents were less optimistic than three months earlier. Banks are very pessimistic, and 90% say Brexit is their biggest challenge, BBC reports. After Prime Minister Theresa May announced Britain will actually leave the single market, HSBC and UBS said they were considering moving thousands of jobs outside Great Britain. A study by the EY Item Club noticed that growth reduced from 2% last year, to 1.3%, and it will continue in 2018 and 2019. These data must be compared with those of 2014 and 2015 : 2.85% and 2.33%. In this context, the International Monetary Fund pinpoints the gap between the Rich and the Poor and calls the government to tackle inequalities The fund, after having upgraded its forecasts for the economy in 2016, revised down its data of growth from 1.7% to 1.4% in 2018. According to the fund, the main reason of this slowdown is the widespread uncertainty over the future of Great Britain outside the European Union. 

We must also take into account elements outside the UK: Donald Trump’s new protectionist policy, the elections in the Eurozone this year (France, Germany…), and finally geopolitical tensions.

Eventually, the British economy will be facing many difficulties during the upcoming years. Will it sink or will it remain strong? It seems that Brexit will have effects in the long term: less, but longer. The economy may not sink, but it will be scared by Brexit. Nonetheless, The Guardian and The Times both highlighted that these figures are made from the same organisations that announced a massive recession after the Brexit. The UK surprised them once, maybe the country will do the same this year. It could rely on a weaker pound to increase its exports by winning new customers overseas.

Lisa Verriere

Sources:

The Guardian, “IMF upgrades UK forecast but notes Brexit terms are ‘unsettled’”, Katie Allen, Monday 16 January 2017

URL:

https://www.theguardian.com/business/2017/jan/16/imf-trump-protectionism-world-economy-trade-us-europe

The Guardian, “UK inflation: now it’s the pound in your pocket being devalued”, Phillip Inman, Tuesday 17 January 2014

URL: https://www.theguardian.com/business/2017/jan/17/uk-inflation-now-its-the-pound-in-your-pocket-being-devalued

The Times, “Economic slowdown may last for three years”, Patrick Hosking, Monday 23 January 2017

URL : http://www.thetimes.co.uk/edition/business/economic-slowdown-may-last-for-three-years-0zvppbtxh

The Guardian, “UK GDP preview: sharp slowdown expected in 2017”, Katie Allen, Monday 23 January 2017

URL: https://www.theguardian.com/business/2017/jan/22/uk-gdp-forecast-a-strong-finish-to-2016-and-a-sharp-slowdown-in-2017

BBC, “UK growth ‘to slow as economy rebalances’”, Monday 23 January 2017

URL: http://www.bbc.com/news/business-38718717

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