Warning signs appear for UK economy
POSITIVE RESULTS SEEN BECAUSE THERE HAS BEEN NOTHING CONCRETE ON BREXIT SINCE REFERENDUM — ECONOMISTS
As Britain begins the delicate process of extracting itself from the European Union, headwinds are expected for the economy even though the forecast financial storm has so far failed to materialise. |
Britain’s economy has for months defied the cataclysmic predictions made by campaigners for staying in the European Union ahead of last year’s referendum but its smooth run shows signs of hitting the skids. As Britain begins the delicate process of extracting itself from the European Union, headwinds are expected for the economy even though the forecast financial storm has so far failed to materialise.
Prime Minister Theresa May has been credited with a deft handling of the economy in the first nine months since the Brexit vote, aided by the Bank of England’s injections of liquidity into the banking system and unflagging consumer confidence.
The economy grew by a wholly respectable 1.8 per cent in 2016 and could expand by 2.0 per cent this year, according to the latest forecasts. But economists say the positive results are because nothing concrete has happened on the Brexit front since the referendum on June 23.
The real question is what will happen over the two years of likely fraught negotiations ahead and the worry is what happens if no deal is agreed.
“An absence of one would drag out the period of uncertainty, thereby threatening economic performance,” said Nina Skero, managing economist at the Centre for Economics and Business Research.
“Right now, it feels like we’re just reaching the top of the Article 50 rollercoaster,” said Paul Drechsler, head of the Confederation of British Industry, the country’s main big business lobby. “Any minute now ... we’ll suddenly drop into the twists and turns of negotiations,” he said.
Drechsler said the worst outcome would be if London and Brussels were to hammer out a divorce without a new trade deal in place that would allow businesses on both sides to prepare for the hefty cost of Britain leaving the European single market.
May, who has said she will take Britain out of the single market in order to be able to reduce immigration, has said she is ready to implement Brexit without a deal if the conditions put forward by EU negotiators are too demanding. Businesses are warning against such an outcome and say that it would hit two key sectors particularly hard — the powerful financial sector and a car industry that is currently in full bloom. By way of example, if Britain is forced to fall back on World Trade Organisation rules for trading with the EU after it leaves, British car exports would face a 10-per cent tariff at the EU border.
Key argument
Any announcement by carmakers about their activities in Britain is already making the government jumpy, be that investment by Nissan in Sunderland in northeast England, job cuts by Ford in Wales or PSA’s takeover of Vauxhall factories.
British employers have also been pushing hard for EU nationals to be allowed to continue coming in.
The immigrant labour force, particularly from Eastern Europe, has greatly helped the economy in recent years.
Sectors that depend on lowskilled workers such as retail, catering and construction have already suffered from a slowdown in arrivals seen since the vote, the Chartered Institute of Personnel and Development said in a study published last month. Businesses are also questioning whether to invest over the next two years, since there will be uncertainty until the end of the negotiations.
“UK demand for funding from both businesses and households has been softening somewhat at the beginning of this year, which we believe is the first sign of the gradual slowing of the economy that we expect for 2017,” said Boris Glass, senior economist at S&P Global Ratings.