Britain’s Economy After Brexit

The Brexit victory sent economic shockwaves through global markets. There is ongoing uncertainty over what will happen to the economy once Britain leaves the EU since it will need to make new trade agreements with the rest of the world. Here we look at some of the potential impacts on Britain’s economy after Brexit.

The European Union single market allows the free movement of goods, services, money and people within the European Union, as if it was a single country. It is possible to set up a business or take a job anywhere within it. The idea was to boost trade, create jobs and lower prices. But it requires common law-making to ensure products are made to the same technical standards and imposes other rules to ensure a “level playing field”. Critics say it generates too many petty regulations and robs members of control over their own affairs. Mass migration from poorer to richer countries has also raised questions about the free movement rule.

Free movement of EU workers

Brexit is expected to end the free movement of EU workers. Britain’s Prime Minister Theresa May has rejected the Brexit campaign’s pledge to introduce an ‘Australian-style points system’ to manage immigration and fill skill shortages. Article 50 will be launched with EU workers rights still unclear. Theresa May has said she remains committed to getting net migration below 100,000 a year.
The latest figures (September 2016) for net migration is 273,000 a year, of which 165,000 were EU citizens, and 164,000 were from outside the EU. These figures include a 56,000 outflow of UK citizens.

Foreign Investment

Europhiles worry that foreign companies will be less likely to invest in Britain and could relocate their headquarters to the Continent. Supporters of Brexit argue that EU countries have every incentive keep trading with the UK, which is a large importer of goods and services.

European Union’s budget

With Brexit confirmed, Britain will no longer have to contribute billions of pounds a year towards the European Union’s budget.

Trade with the EU

Both sides want trade to continue after Brexit with the UK seeking a good deal for those who wish to trade goods and services to the EU. Currently, the UK is part of the EU customs union, but this stops the UK being able to do its own trade deals with other countries. A customs union is where countries agree not to impose tariffs on each others’ goods and have a common tariff on goods coming in from elsewhere. With Donald Trump as US President, Britain is hopeful for a swift and positive US trade deal.

The City

Whilst US bank Wells Fargo’s £300m purchase of a new London HQ shortly after the EU referendum is positive news, HSBC warned that it could shift jobs to Paris in the event of an “out” vote before the EU referendum. Goldman Sachs also warned that it may have to “restructure” its UK operations which currently employ about 6,000 people. JP Morgan and Morgan Stanley have also hinted they may have to move to European centres. The final decisions will depend on whether UK based banks are free to sell their services across the EU.

Stock markets

The FTSE 100 fell into the red after the referendum. This was short lived as Britain is only a small component of their business. The FTSE 250, made up of smaller domestic companies, has also recovered, but its rebound has been much slower and the index has under performed relative to the FTSE 100. There may be a boost to exporters from the sterling’s dramatic fall against major currencies, but the raw materials they import will become more expensive.

Interest rates

The Bank of England shaved interest rates a quarter point to leave base rates at a record low of 0.25 percent. It also re-started its programme of buying bonds as a way of getting money into the economy, known as ‘quantitative easing’.

Business confidence

The initial estimate for fourth-quarter GDP from the Office for National Statistics matched the 0.6 percent growth recorded in the third and second quarters. The economy’s resilience has confounded forecasters, some of whom feared the UK would slip into recession following the shock outcome of the EU referendum in June.

There are currently few signs of a Brexit-related slowdown in the economy. A modest slowdown in in the growth of the economy is expected in 2017 as Brexit-related uncertainty has not disappeared and might begin to weigh noticeably on business spending. More importantly, the sterling-related inflation squeeze on households is only just beginning. The inflation rate is expected to roughly double by the end of 2017 from the latest estimate of 1.6 percent.

The weaker pound has lead to widespread expectation that asset strippers will take over British companies.