BRITONS FEELING PRESSURE OF BREXIT DIVORCE
Support may have its days numbered if troubles turn chronic, writes Joe Chidley.
Is the march of economic nationalism – the inward-looking stuff that got Donald Trump elected – already slowing? Some wishfulthinking neo-liberals might point to France, and the moderate Emmanuel Macron’s recent victory over Marine Le Pen and her rightist Front National. But they might find better evidence back in Old Blighty, where the reality behind Brexit, the nationalists’ miracle, is beginning to emerge.
Despite all the Leave campaign’s assurances, the U.K.’s divorce from the European Union doesn’t look like it’s going to be amicable. EU officials, stoked by Germany and France, seem to be playing hardball. And tensions are running high on both sides. At a private meeting late last month, Prime Minister Theresa May and European Commission President JeanClaude Juncker reportedly disagreed over how much the U.K. should pay to leave the union, according to European newspaper reports. European estimates put the number somewhere around 100 billion euros; May reportedly told Juncker she thinks it should be somewhere around zero.
The prime minister seems nonplussed by the apparent fact that European resolve did not disappear with the Maginot Line. She’s taken to lashing out at European media for publishing fake news. She blames the EU bureaucracy in Brussels for propagating rumours of discord – and says they’ve hardened their negotiating position in a brazen bid to influence the U.K. election. That sounds like a familiar formula, and no doubt whining about foreigners is intended to play well with her base. Come the June 8 vote, she’s asking for a mandate “to fight for Britain.”
As predictable as the dustup is, it still matters – because Brexit is starting to pinch regular Britons in the pocketbook. And should the bad mojo between the EU and Britain lead to a long, protracted or unsuccessful negotiation (May has taken to darkly declaring that “no deal is better than a bad deal”), it isn’t going to make them feel less pain.
At core, the trouble is money – specifically, the pound. Amid post-Brexit investor jitters, it has declined against the U.S. dollar by more than 13 per cent. (For comparison, the loonie has declined by just more than five per cent over the same period, and the euro by less than four per cent.) That’s despite the U.K. coming in as the fastest-growing economy in the G7 last year (against all the dire predictions of an immediate post-Brexit meltdown). And that’s after a month-long rally that saw the pound climb more than five per cent between early April and early May.
That rally now seems to have stalled, owing to the Bank of England’s release of its economic outlook last Thursday. Inflation, it noted, has been tracking well above the two-per-cent target rate, and the Bank revised its inflation forecast for the year to 2.8 per cent from 2.4 per cent in February. The reason: The postBrexit devaluation of the pound has started to flow through to the real economy, in the form of higher consumer prices.
That wouldn’t be such a problem if wage growth kept pace. But it won’t: The Bank estimates wages will grow by half a percentage point less than inflation this year. That means 2017 could be tough for average Britons. “The wages that people are getting,” said Bank of England governor Mark Carney, “are not going to be sufficient to compensate for the rise in consumer prices, the prices in the shop.”
One way to address the currency challenge would be for the central bank to raise interest rates, which are now at 0.25 per cent. Yet the U.K. economy is suddenly looking shaky. Firstquarter GDP growth came in at a disappointing 0.3 per cent, and the Bank of England lowered its 2017 forecast to 1.9 per cent growth. Raising rates might support the pound, but would jeopardize an already-tepid expansion.
For what it’s worth, a depressed pound should help U.K. exporters, whose goods have become more price-competitive; on the other hand, U.K. firms are also seeing the cost of raw materials rise. On top of that, consumer companies might be reluctant, over time, to pass along higher prices to their customers – and will instead look for concessions on the labour side, by containing wages. Meanwhile, firms, especially exporters, will naturally want to limit investment until there’s clarity around the U.K.’s relationship with the EU.
On that front, clarity seems a long way off, leaving the average Briton caught in an imperfect storm of low economic growth, a devalued currency, negative real income growth and higher prices. Those pressures will hit the elderly and low-income earners harder than others; notably, they’re the very groups that most vigorously supported leaving the EU in the first place.
May’s Conservatives seem to have a lock on the June 8 vote, but let’s see how long Britons’ support lasts if this year’s troubles turn chronic. The Bank of England expects wage growth to recover sometime next year, but that’s assuming a “smooth” exit from the EU. If that doesn’t happen, we’ll look back at the unexpected post-Brexit calm as merely a prelude to the storm.