ANALYSIS: In Brexit delay, UK economy remains prisoner of uncertainty | Fin24
 
  • Renewables

    The govt is assessing a R160bn plan to establish the world’s largest green-energy financing initiative.

  • Biggest Jump

    Oil prices have spiked after drone attacks in Saudi Arabia disrupted global supply.

  • Fin24’s newsletter

    Sign up to receive Fin24's top news in your inbox every morning.

Loading...

ANALYSIS: In Brexit delay, UK economy remains prisoner of uncertainty

Apr 14 2019 17:14
A handout photograph released by the UK Parliament

A handout photograph released by the UK Parliament shows Britain's Prime Minister Theresa May reacting on the front bench in the House of Commons in London. (Jessica Taylor, UK parliament, AFP)

While the merits of Brexit have been debated endlessly during Britain's highly divisive political crisis, nobody disputes that the economy has been hurt by the lack of clarity surrounding the exit from the European Union. Last year, it grew by its lowest rate since 2012, just 1.4%.

Businesses have become increasingly cautious and postponed or cancelled investment plans as they don't know what Britain's trading relationship with its main partner, the rest of the EU, will look like after Brexit. Foreign investment into the country has slumped, too – a worrying sign of a lack of confidence.

While an extension reduces the likelihood of a 'no-deal' Brexit, which would see the country crash out of the EU with likely painful economic consequences, it prolongs the uncertainty for businesses.

"There's a big difference between an extension, even a long extension, and an agreement with a transition to a known end-stage," Bank of England Governor Mark Carney said recently. "Wherever we're headed, it would serve the economy well to have a transition period to that new world."

Executives have been haunted by the same questions ever since the country voted in June 2016 to leave the EU. Will tariffs be slapped on exports? What will the rules governing the hiring of staff from other EU nations look like? What happens to the future functioning of closely linked and cross-border supply chains?

Many companies have sounded the alarm: Airbus Chief Executive Tom Enders has warned that the company could move its wing-building operations out of Britain and has condemned the uncertainty as a "disgrace"; and Jurgen Maier, boss of German manufacturing firm Siemens, has said the Brexit impasse is turning Britain into a "laughing stock". The list goes on, with EasyJet last week warning that summer bookings were being constrained by the ongoing uncertainty.

Smaller British economy

Consumers, a mainstay of British economic growth, have also become more restrained, partly because inflation rose in the wake of the 2016 Brexit vote. That led to the pound falling by around 15% against other currencies and import costs rising.

According to the Centre for European Reform, the British economy is 2.5% smaller than it would have been if the country had voted to remain in the EU, largely due to higher inflation and lower investment.

"The UK missed out on a broad-based upturn in growth among advanced economies in 2017 and early 2018 and the economic cost of the decision so far is sizeable," said CER's deputy director, John Springford.

As Britain approached its initial Brexit deadline of March 29, later delayed to April 12, much of the focus has been on the economic risks of leaving the EU without a deal.

Most British lawmakers have voted against that 'no-deal' scenario amid worries that it would lead to a deep recession that would see many firms go bankrupt and unemployment turn sharply higher. The Bank of England thinks the recession will be similar to the one suffered after the global financial crisis, when the economy contracted about 6%.

The rest of the EU would suffer, too, if Britain crashes out of the EU with no deal. Belgium, Germany, Ireland and the Netherlands, for example, have close economic ties with Britain and would face sizeable economic shocks. While the direct impact would be more modest outside Europe, concerns about the ramifications of such an unprecedented situation would likely roil financial markets and weigh on an already weakening global economy.

EU Summit

The EU has since given the UK an extension until October 31.

Many economists think the British economy will end up faring worse than predicted this year. Most had assumed that a deal would have been secured by now and that Britain would be in a smooth transition to a new relationship with the EU.

Samuel Tombs, chief UK economist at research firm Pantheon Macroeconomics, says his assumption has been that Britain's EU exit deal would have been ratified by June, "unlocking some catch-up in business investment", and thereby driving growth.

"Prolonged Brexit uncertainty likely would ensure that businesses continue to hoard cash and defer capital expenditure," said Tombs, who expects growth this year to be around last year's muted level in the event of a long extension.

In Brexit, nothing appears to be ever resolved.

uk  |  brexit
NEXT ON FIN24X

 
 
 
 

Company Snapshot

Money Clinic

Money Clinic
Do you have a question about your finances? We'll get an expert opinion.
Click here...

Voting Booth

What's your view on deep sea mining?

Previous results · Suggest a vote

Loading...