Brexit takes a toll two years after vote
U.K. shunted into slow lane as uncertainty over divorce from EU drags on
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 pacesetter 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 favour 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, wellpaid 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 per cent 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 per cent 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 per cent late last year.
The weaker pound helped some companies: exporters and multinationals that do not sell mainly in the U.K. 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 & Spencer planning deep cuts.
While prices rose, wages lagged, even though unemployment is at its lowest since 1975, at 4.2 per cent.
“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 six months.
And 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.