Hello readers, welcome back to my blog on the interesting economics news stories of the week.
You may remember me discussing, a few weeks ago, the impact of Britain’s decision to leave the EU on the UK economy and how this would lead to a number of damaging effects. This week I will be reviewing the situation and updating you with what has happened since then, as well as considering some of the benefits that Brexit could potentially bring with it. Many of us were disappointed with the result; however, there’s not really much we can do to change the decision but instead to look at the positives that may arise from this. Since we live in a democratic society where everyone has the right to vote then we should really respect the outcome, whatever it may be.
In today’s, post I hope to be able to put a positive spin on the whole Brexit issue that has been troubling our minds over the past few months and provide a sense of optimism going forward for the New Year. As Shakespeare wrote in Macbeth “What’s done is done and cannot be undone”. In other words, perhaps instead of still mourning the decision we should focus on how we can extract the very best solution from this. This may seem rather contradictory to the points I raised in my previous post and very much what Nigel Farrange would preach, although as with everything one must assess the situation from both sides. If you have the time, please do give my take on this story a quick read, and hopefully, you will see, from an economic point of view, why Brexit might not be all bad news. As always if you have any questions, please post them below and I will try to respond to them. Alternatively, you can send them directly to my personal email firstname.lastname@example.org
What has actually happened so far?
It is important to note that no major decisions or trade deals have been set in stone apart from the decision to ‘vote out’ back in June. The knock on effects of this announcement such as a fall in the value of sterling were purely down to speculation and ‘animal spirits’ in the economy.
Theresa May has announced that Article 50 of the Lisbon Treaty, which triggers two years of formal negotiations, will be invoked before the end of March 2017, which in practice this means the UK will be out of the EU by the summer of 2019. However the recent legal challenge – to force the government to give MPs a say before the Article 50 process starts – has been heard in the Supreme Court, with the decision expected in January.
The government has also agreed to publish some details of its Brexit “plan” before Article 50, but it is not clear how much detail will be released. Theresa May has said she does not want to disclose too much as this will affect her negotiating power.
What benefits could we potentially see then?
Firstly the predictions that were made about Brexit such as sluggish growth, a surge in inflation and mass unemployment, turned out not to be as severe as they were predicted and actually, we have seen an increase in Britain’s export sales, as well as a 7.1% rise in flight bookings to the UK, as a weaker pound makes Britain a cheaper destination for overseas tourists. Caissa Touristic, a tour operator specialising in Chinese travel to Europe, says it saw a 20% increase in enquiries and bookings for the UK this summer compared with the same period last year.
Nissan, after an undisclosed deal decided to keep its production in the UK, which has secured the future for Sunderland’s 3000 workers based at and around the factory. In terms of unemployment, in the UK, this has not been impacted and remains stagnant at around 4.8%.
London house prices still remain at an average hefty price tag of £700,000 and although house prices over £5 million have been worst affected, the market seems to be slowly recovering from this initial shockwave.
One of the main reasons why people voted for Brexit was because of immigration. It is, however, questionable as to whether putting stricter controls on immigration will have positive effects, as immigrants who are strongly motivated and have a work ethic that perhaps many people in the UK do not have. Immigration is also needed to support an ageing population. Undoubtedly we do need to have some control as immigration has grown faster than construction in the UK and as basic economics principals tell us that we have to make decisions with what to produce, how to produce and whom to produce it for in order to maximize utility. In other words, there are limits as to hospital appointments/operations and places in schools. Perhaps Brexit could solve this conundrum by allowing the UK to ‘cherry pick’ the best global talent.
Outside the EU, the UK would not need to pay it’s £10 billion net contributions to the EU budget. The UK could also replace the Common Agriculture Policy, which consumes 38% of the total EU budget, with more efficient farm subsidies in the UK.
Leaving the EU, although at the outset may seem like a lot of hassle and ‘unnecessary’ stress it gives us a chance to review trade deals and make better ones. Some would argue that why change your winning formula when it was already working. Although was it really working? With a current budget deficit*” is estimated to be £19.1 billion, is this really what a winning formula sounds like?
Everything must go through everyone. For example, Canada’s trade deal with the EU was nearly ruled out when Belgium was on the verge of declining it. Similarly, with the UK it would have more control and would be able to change things much more quickly.
With regards to trade, well that really depends on whether we are heading towards a more soft or hard Brexit. If it is the latter, the option which firms and businesses seem not to be in favour of, it could lead to unnecessary tariffs, thus driving up the prices of goods as well as lead to inflation. It is estimated that by Christmas next year inflation could be as high as 5% which would lead to an almost inevitable rise in interest rates by the monetary policy committee (MPC).
If we end up with a soft Brexit this means that we will to some extent have to agree to free movement of people and since immigration was the ultimate driving force behind the vote, this would not be a favoured option by ‘Brexiteers’
In terms of growth, latest figures show the economy grew by 0.5% in the three months after the Brexit vote, powered by the UK’s services sector. This was slower than the 0.7% rate in the previous quarter, but stronger than analysts’ estimates of about 0.3%.
Brexit was referred to as ‘protest vote’ or said to be falsified by facts, although this is perhaps a slight hyperbole. If so many people were in favour of it then surely there must be of some benefit. Are we saying that 52% of the population are all ‘uneducated’ and generalizing that it was just people in socially deprived areas that voted Brexit? Boris Johnson, arguably one of the most prominent politicians has described Brexit as an escape out of prison.
The EU “has become centralizing, regulating and controlling, the opposite of what is needed for jobs and future success,” said Gerard Lyons, a leave supporter, and Johnson’s chief economic adviser, in a column for the London evening standard. Countries that succeed in the future global economy will “need to be flexible, adaptable and control their own destiny. Brexit allows us this,” he said.
The true answer to whether Brexit can be good is that we don’t really have a clue. Economists can make predictions using probability distributions, publish complex statistics or use theories proposed hundreds of years ago by famous economists such as the like of John Maynard Keynes, although the reality is we can’t predict the future. These assumptions that economists make quickly become inaccurate when we have surprises or shocks to the state of equilibrium in the economy such as a recession or war, or natural disasters. If these assumptions are wrong, the final outcome will be predicted as wrong. Only time will tell if Britain has made the right decision or not.
These shocks are becoming more and more common, with Brexit in the UK to Mr. Trump in the USA. Perhaps we are just living in a new type of society that we have not yet come to terms with.
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