The Limited Impact Of Brexit So Far

Prior to the referendum last year, there were a lot of gloomy forecasts about what would happen to the UK economy if there was a vote to leave the EU. Recently, those who published these forecasts have come under pressure for being too negative in predictions in an attempt to influence the vote. These claims are becoming more pertinent now, as data shows the UK economy is relatively strong at the moment.

The National Institure for Economic and Social Research, suggests the economy grew 0.5% in the final quarter of 2016, and 2% overall in 2016. A figure that is in line with the long-run potential growth rate of the economy. This week, strong industrial and manufacturing production data was released, the only weakness was seen in construction output, which fell 0.2% in November, but it accounts for just 6% of the economy. The data coming in seems to suggest that the uncertainty surrounding Brexit has not led to a slowdown, at least not yet.

This is a view shared by the financial policy committee. Governor Mark Carney yesterday spoke in front of the commons treasury committee and said that Brexit is no longer the biggest risk to the UK’s financial stability. Carney elaborated, saying the biggest risk from Brexit was that it could amplify four other dangers to the economy, such as the weakening value of Sterling. This does seem to be a peculiar way of looking at things. As it is Brexit that cased the Pound to fall to nearly 20% in the last 12 months, it has been trading below $1.21, without Brexit it could be around the $1.50 level, if not higher. An upside of the weaker Pound, is that exports are more competitive and imports more expensive, yet this is not supported by the current account, which widened to a £4.2bn deficit. Those who were in favour of Brexit have also pointed to the FTSE100 as a sign that Brexit has had a positive impact on the economy. Yesterday it broke 7300 for the first time and set a record 12th up day in a row, the last 10 of which have all been record closes. This marks quite a rally from around the 6000 level before the referendum. However, what it fails to account for, is that in dollar terms, the FTSE has fallen 4% in the last 7 months, highlighting that not all is as well with the economy as some want to believe.

The BoE’s Quarterly Inflation Report will be released next month and its forecasts for economic growth are expected to rise for the second report running. To some, this again emphasises that predictions were pessimistic prior to the vote. However, Mark Carney claims that a lot of the recent improvements were due to the stabilising impact and the actions taken by the BoE in response to Brexit. When they cut rates and expanded QE in August last year, the expectation was for another cut before the year end. Expectations have since been reversed, the markets currently do not expect further easing of monetary policy. With strong data, improving forecasts and rising inflation due to a weaker Pound, the next move is expected to be a rate hike, although, the market is only pricing in a 25% chance of that occurring in 2017.

If the Bank of England is not afraid of Brexit right now, the government is. Chancellor Hammond has called for German politicians not to harm EU growth, by punishing Britain over Brexit. He went on to say that a strong and stable EU and Euro, is in Britain’s interests whether we are in the EU or not. He was speaking at the same time as a survey was released, showing that German business owners are not worried about Brexit. Under 10% of German business owners are concerned about Brexit, but over 25% feel they will benefit from business leaving the UK. If these figures are representative of the wider view of Germans, then there is little to suggest that Germany will be willing to make concessions to Britain during negotiations, something that some may have been relying on.

Whilst the risks and downsides of Brexit appear not to have materialised yet, it must also be noted, that technically nothing has changed. Article 50 is still yet to be triggered which will then set a two year deadline on Britain leaving the EU. So it is not until March 2019 that any legislation or trading terms will change. Sentiment has changed though, and this could lead to investment decisions that take business away from the UK. Major corporations are unlikely to expand in Britain right now and some are suggesting offices could be relocated to other EU countries. As negotiations begin and people get a feel for how hard or soft Brexit will be, the impact on the economy will grow. Suggestions that a £1000 levy on EU workers employed in the UK were decried yesterday and whilst unlikely, it has not been ruled out. Suggestion of any more similar policies to this, will make a ‘hard Brexit’ more likely and this would likely be a detriment to the economy.

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Reuters: Business News