2 years on, Brexit vote has taken a toll on UK economy

No one knows what will happen once Brexit takes effect in 2019 (Shutterstock)
Updated 23 June 2018
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2 years on, Brexit vote has taken a toll on UK economy

  • Big companies are sounding the alarm bell, with plane making giant Airbus this week threatening to pull out of the country, where it employs 14,000, if it gets no clarity on future trade deals
  • The governor of the Bank of England, Mark Carney, estimated recently that average household incomes are around 900 pounds lower than the bank was forecasting on the eve of the referendum

LONDON: While it’s still unclear what Brexit will look like when it happens next year, the decision to leave has already had a clear effect on the economy: households are poorer, companies are more cautious about investing, and the property market has cooled.
In the two years since the vote to leave the European Union, Britain has gone from being a pace-setter among the world’s big economies to falling into the slow lane. And the uncertainty over what relations with the EU will be when Brexit becomes official on March 29, 2019 could make matters worse.
Prime Minister Theresa May’s Conservative government remains split on what those relations should be. There are those who favor a “hard Brexit,” a clean break that takes Britain out of the bloc’s free trade union but also gives it more freedom to strike new trade deals around the world. Others want to keep Britain as close as possible to the EU, Britain’s biggest trading partner, which could mean it has to obey more of the bloc’s rules.
Big companies are sounding the alarm bell, with plane making giant Airbus this week threatening to pull out of the country, where it employs 14,000, if it gets no clarity on future trade deals.
“Thousands of skilled, well-paid jobs are now on the line because of the shambolic mess the government have created over the Brexit negotiations,” said Darren Jones, the lawmaker for the community where Airbus has its plant.
Before the referendum of June 2016, the British economy had been one of the fastest-growing industrial economies for years. Now, it’s barely growing. In the first quarter of this year it expanded by just 0.1 percent from the previous three-month period, its slowest rate in about five years.
For most people, the first and most noticeable impact was the drop in the pound. The currency slid 15 percent after the vote in June 2016 to a post-1985 low of $1.21. That boosted prices by making imports and energy more expensive for consumers and companies — the rate of inflation hit a high of 3 percent late last year.
The weaker pound helped some companies: exporters and multinationals that do not sell mainly in the UK But it hurt consumer spending and businesses that depend on their shopping. The retail industry was hit hard, with high-profile companies like Toys R Us and Maplin going bust, and supermarket chain Marks and Spencer planning deep cuts.
While prices rose, wages lagged, even though unemployment is at its lowest since 1975, at 4.2 percent.
“After Brexit, prices definitely went up,” said Nagesh Balusu, manager of the Salt Whisky Bar and Dining Room in London. “We struggled a bit earlier this year, so now we’ve increased the prices.” The bar is next to Hyde Park, a popular destination for foreign visitors. “The tourists have a good exchange rate. They know they can spend a little bit more than they usually do. But the locals are coming a little less. They are starting to think about how much they spend.”
The governor of the Bank of England, Mark Carney, estimated recently that average household incomes are around 900 pounds lower than the bank was forecasting on the eve of the referendum.
The real estate market, meanwhile, has cooled considerably, with the number of property sales in London near a historic low last year, according to estate agent Foxtons.
While some foreign prospective buyers were attracted by the drop in the pound, others seem to have been scared off by uncertainty over what Brexit might mean for their investment.
House prices are stagnating after years of gains, also due to expectations that the Bank of England will keep gradually increasing interest rates.
Nic Budden, Foxton’s CEO, predicts that the real estate market will remain challenging this year, while Samuel Tombs, analyst at Pantheon Economics, predicts that house prices will flatline for the next 6 months.
Against the backdrop of uncertainty, businesses have become more reluctant to invest in big projects. Because Brexit could lead to tariffs on EU imports of British goods, companies are hesitant to spend big on British plants and office space before they know what the new rules will be.
Benoit Rochet, the deputy chief of the port of Calais, the French town across the Channel from Britain, complained to a parliamentary committee this month that “we know there is Brexit but we don’t know exactly what Brexit means.”
“You are not alone,” responded the Conservative chair of the committee, Nicky Morgan.


Oil markets jittery over lower demand forecasts

Updated 18 November 2018
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Oil markets jittery over lower demand forecasts

RIYADH: Oil prices continued to nosedive last week over demand concerns amid an outlook of a slowing global economy. The strong US dollar weighed on both oil prices and the global demand outlook. Currencies weakened against the dollar, eroding their purchasing power.
Brent was down to $66.76 per barrel and WTI dropped to $56.46 per barrel by Friday. The former came close to its one-year low as both the International Energy Agency (IEA) and OPEC released monthly reports that articulated a darkening demand outlook in the short term. This increased fears of an oil demand slowdown. Market fundamentals also suggest that price volatility is likely to remain high in the near-term, although the oil market reached a balance in early October.
OPEC’s Monthly Oil Market Report (MOMR) arrived with bearish sentiments, revising downward its oil-demand forecast for this year and next, for the fourth month in a row. It forecast that global oil demand will rise by 1.29 million barrels per day (bpd) in 2019, 70,000 less than what OPEC expected last month. The MOMR also forecast increasing non-OPEC supply growth for 2019, with higher volumes outpacing the annual growth in world oil demand, leading to an excess in supply. The report was welcomed with open arms by the IEA, which had been at least in part responsible for driving sentiment toward a bear market. Surprisingly, OPEC warned that oil demand is falling faster than expected. Necessary action is a must.
Saudi Arabia is not sitting idly by while oil markets look as if they are heading toward instability. Markets were expecting severe US sanctions on Iran, which could have resulted in supply shortages once Iran’s crude exports went to zero. The unexpected introduction of waivers to allow eight countries to continue importing Iranian oil, was however an eye-opener. Now, as the world’s only swing producer, Saudi Arabia will have to take other measures to balance oil markets and drain excess oil from global stockpiles.
Despite what some analysts are claiming, there is currently no strategy to send less oil to the US to help reduce US stockpiles. Yes, some have claimed that Saudi crude shipments to the US are at about 600,000 barrels per day this month, which is a little more than half of what was being shipped in the summer months. But the reasons for this are related to seasonally low demand, the surge in US inventories and refineries heading into their winter maintenance season. Remember that November crude oil shipments were allocated to the US refiners last month before the US waivers on the Iranian sanctions were revealed. Also, keep in mind that Saudi Arabia owns the largest refinery in the US, which has a refining capacity that exceeds 600,000 bpd.

Lurking on the horizon is the massive US budget deficit and increasing rumblings that the US economic boom is over. 

It must be noted that there is a degree of financial manipulation underway in the oil futures markets. At the moment, there are few places where quick profits can be made, so some investors moved from stocks to commodities. Now, there are downward pressures on oil prices as some commodities market traders went long on oil futures, thinking that crude prices would rise. Then these same traders shorted natural gas, assuming that with a warmer winter, prices of that fuel would fall. Unfortunately for the traders, Trump’s sanction waivers on Iranian crude oil exports and cold weather on the US East Coast, caused exactly the reverse to take place. Oil prices fell and natural gas prices rose. Traders were therefore forced to sell their assets to cover margins, pushing oil prices lower. It is expected that some hedge funds and investment funds will also be moving away from going long on oil futures and this will cause further selling.
Lurking on the horizon is the massive US budget deficit and increasing rumbling that the US economic boom is over. The US federal budget deficit rose 17 percent in the 2018 fiscal year. It is now larger than in any year since 2012. Federal spending is up and amidst US President Donald Trump’s tax cuts, and federal revenue is not keeping pace. To make matters worse, the strong US economy and interest rate hikes by the US Federal Reserve have boosted the dollar.
A strong dollar makes commodities such as crude oil more expensive in international markets and reduces demand. Trump wants oil to be priced as low as possible to help bolster the US economy, which is clearly under strain, and to facilitate sales of crude abroad. But with a looming global oil shortage just a few years away due to a lack of upstream investment, it is incumbent on global oil producers to consider the long term in their output decisions.

* Faisal Mrza is an energy and oil market adviser. He was formerly with OPEC and Saudi Aramco. Reach him on Twitter: @faisalmrza