On the 23rd June 2016, the proletariat rose from the ashes to break the shackles of globalisation from their ankles. To once again rescue Great Britain from the clutches of the evil European imperialists, to unleash a voice of defiance and declare this day our Independence Day…
Or so we thought.
It turns out that instead our great kingdom decided to go bungie jumping, without a harness. Strangely those ghastly remoaners often warned about such dangerous endeavours yet lo and behold their warnings were unheeded by the patriotic leavers, probably because Britain had had enough of experts. It isn’t rocket science to see why such a decision has seriously worrying repercussions. One could write a book on said consequences but I’ll focus on some of the economic impacts (for now) of Britain’s momentous vote to break away from the European Union.
On the eve of the vote the pound reached one of its highest levels and just hours afterwards it plummeted, and continued to plummet until the 11th October when the pound was valued at just $1.21. Whilst it is true, a weak pound is beneficial for manufactures exporting raw materials as the cost of exporting decreases, it is also true that this has minimal effect on the UK economy. For around four decades the manufacturing industry has been pulverised so the idea that it can be suddenly revived with the renewed interest in exports is a largely farcical idea. In fact its services which make up the economy, 78.4% of the workforce is in services and almost 80% of GDP comes from the services industry. Therefore cheap imports which are achieved through a strong pound are essential to the British economy.
Sadly the bad news doesn’t stop there, inevitably when you have more expensive imports, firms have to ramp up the price to maintain the rate of return and counteract the effects of these more expensive imports. When 66-70% of your GDP comes from consumption you know that this is ultimately a bad thing for your economy. It won’t just be a small increase in inflation but according to the Bank of England Governor, it’s likely to go well over the 2% target, an increase of 1.4%. Effects of more expensive imports have already been felt, only recently did Unilever, one of Tesco’s largest suppliers, engage in a stand-off with Tesco over price increases on basic goods. They argued that the depreciation of the currency has meant more expensive imports therefore the cost must be passed onto the customer. It is okay for the richer individuals but those who will be hit hardest, as always, are the poorest individuals of the UK and we haven’t even left the EU yet. However it seems that consumer confidence has not been damaged after the vote and the price changes have yet to feed to the consumers.
There is also the issue of the financial sector. Love it or hate it, this questionable part of the economy does support at least 8% of the UK’s economy, it is the country’s largest industry with over 50% of its contribution coming from London. Being part of the EU Single Market gives the banking industry certain passporting rights which means it can essentially exchange and deliver its services from London to all over the European Economic Area, a 500 million citizen market. As a result of the vote and the likelihood that we won’t remain part of the common market means our financial industry will no longer have access to these passporting rights, therefore they will have to relocate to an EU country in order to deliver its services across all the other 27 countries. In fact we have already seen certain groups leaving London, whole ‘mergers & acquisitions’ departments are being moved to Frankfurt and large scale relocations are likely to begin unless the banking industry does receive a favourable deal within the Brexit negotiations. It is hard to predict the impact on the banking industry but we can’t be overly pessimistic, London still does has more favourable regulations than other EU countries which could act as a more deciding incentive to remain in London despite the potential loss of passporting rights.
The simple act of leaving the EU Single Market itself, which seems highly likely, could have serious consequences for the British Economy. As a part of the Single Market and the Customs Union the UK is allowed to conduct free trade with the other 27 EU member states, adopt a common standards policy and impose common external tariffs on non-EU countries. This allows a hub of competitive and growing free trade between the member states whilst also maintaining a high standard of goods and services. All UK businesses are forced to maintain these standards already, leaving would lead to costly differences between the UK and EU product standards. Some of this could be avoided by negotiating a Free Trade Agreement (FTA) with the EU during the 2 year period after Article 50 is triggered. However considering CETA, the Canadian FTA with the EU, took 7 years to be negotiated and still has not been formally ratified, it would be absurd to suggest the UK could negotiate an FTA with the EU in 2 years (technically 1 and a half years) let alone 48. Then there is the issue of the 48 other FTAs the EU has with other non-EU states, the UK would have to renegotiate these as they were mixed agreements and not bilateral trade deals.
Therefore if this likely scenarios plays out the UK would have to resort to World Trade Organisation (WTO) rules. As part of the WTO’s General Agreement on Trade in Services (GATS) the EU would however have to give the same treatment to the UK (in terms of trade and aside from preferential agreements) as it does to all other non-EU states, this could potentially protect us from any punishing treatment. Unfortunately part of this treatment the EU has with other non-member states maintains many tariffs and non-tariff barriers on trade (excluding preferential agreements), for example its 10% tariff on cars. These trade restrictions would be extremely hurtful to the UK economy which relies heavily on imports for its largely service based economy, as well as hurting consumer spending which accounts for a large proportion of GDP.
This all seems like a quite a dim future for the UK economically, hurtful trade barriers, inflation, damage to our biggest industries… although we should not be too depressed about these prospects. There is a strong argument that the EU will have to give us a fair trade deal. The the rest of the EU has a trade surplus with us meaning they rely on the UK as market to export their goods to, even though in terms of services (which makes up nearly 80% of our economy) we export 37% to the EU as opposed to importing 22% from the EU. Hence it seems like we both need each other economically to a certain extent.
It is therefore immensely difficult to predict with certainty and confidence how the UK economy will emerge from this unprecedented vote. A lot of it relies on how the negotiations play out but we do not know the stance of our own government, neither does the market, which leads to a lack of confidence and uncertainty. Predictability is important in an open market system. This is likely to hurt investments but on the bright side it does not seem like consumer confidence has actually been damaged. So, Brexit, as eloquently put as Shadow Chancellor John McDonnell, is going to be one hell of a breakfast… a dog’s breakfast.