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.


Stronger US dollar unlikely to derail bullish view on commodities — Goldman Sachs

Updated 21 September 2018
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Stronger US dollar unlikely to derail bullish view on commodities — Goldman Sachs

  • The dollar has been lifted by a stronger-than-expected US economy, the world’s largest
  • A stronger greenback makes the purchase of dollar-denominated international commodities more expensive for holders of other currencies

BENGALURU: Goldman Sachs said a stronger dollar is unlikely to derail its bullish view on commodities, which are likely to find support from physical shortages.
The dollar has been lifted by a stronger-than-expected US economy, the world’s largest, and that’s a positive sign for global growth, the US investment bank said.
The US dollar index has lost more than 1 percent this week, but this follows months of strong demand over US-China trade-related tensions, as investors bet the greenback would gain at the expense of riskier currencies.
“The risk aversion this summer created significant emerging market destocking, particularly in China, as consumers attempted to avoid a strong dollar and tariffs by liquidating inventories,” Goldman said in a note dated on Thursday.
A stronger greenback makes the purchase of dollar-denominated international commodities more expensive for holders of other currencies, making buyers and users more likely to draw on any stored materials in preference to imports.
“This liquidation, however, has a physical limit with Chinese destocking having already created significant increases in physical (premiums) for oil and metals – a sign of physical shortages.”
Going forward, oil had a strong fundamental outlook helped by US demand growth, supply losses and disruptions, and still constrained US shale output, Goldman said.
The bank said its near-term Brent crude oil price target remained at $80 a barrel.
The bank said it was moderating its bullish view for gold due to a sell-off in emerging markets, and it lowered its 12-month price forecast for the metal to $1,325 per ounce, down from $1,450 an ounce earlier.