With just over a month past since the UK voted to leave the European Union, Dr Steven McCabe, Associate Professor, Birmingham City University Business School looks at how this has effected the country’s economy and what will happen next.
Last week’s announcement by Philip Hammond that there is an intention to significantly change the Government’s economic policy in the coming months prior to the autumn statement would appear to herald the end of austerity. For many this is overdue and we can expect the period of ‘Osborneonomics’ to be consigned to history. How history will judge former chancellor George Osborne and, until the fateful Brexit vote of 23 June favourite to succeed David Cameron as prime minister, is a moot point. However, though he was right about the need to remain (my opinion) he was utterly mistaken about the way in which the economy should be managed.
The here and now of the British economy looks pretty bleak. The GDP data produced by ONS (Office for National Statistics) for the second quarter showing growth of 0.6 per cent should blind no one to the reality of what has occurred since 23 June. Whilst April was a very good month for activity the data for May is much less so and June tends to be a guesstimate. Let’s see what the real figure is when it is adjusted on the basis of actual data for the quarter.
What we can expect in terms of future economic data is that, at best, growth will grind to a halt. Indeed, the ‘new’ government are all-too-aware that there is severe danger of recession (two successive quarters of contraction). Recent data produced by analysts monitoring supply IHS Markit and CIPS point to a large fall in both orders and output.
Manufacturing, a sector that was doing well in the early part of quarter two, is likely to be particularly negatively affected by Brexit. The SMMT (Society of Motor Manufacturers and Traders) are pessimistic about the consequences of the vote to leave the EU and believe that there will be an impact in terms of growth, jobs and investment. It’s salutary to remember that just under 80 per cent of the cars built in the UK factories in the first six months of 2016 were for export and, significantly, the biggest overseas market was the EU.
Perhaps what is alarming is that the services sector – which accounts for almost 80 per cent of the output of the UK – and in the aftermath of the GFC (Global Financial Crisis) has been relied on is showing signs of frailty in that in Q2 it grew by 0.5 per cent which is down from 0.6 per cent in Q1. Construction, which accounts for 6 per cent of output contracted for a second consecutive quarter (0.4 per cent). Given that construction is traditionally used as an indicator of what is going on this will be seen as a harbinger of what is to come. No wonder the big property companies are concerned about the prospects of making money.
What we can expect is that the government will respond by reducing interest rates on 4th August (the story about NatWest charging businesses for having credit balances should interest rates go negative is prescient). Additionally there will be a need for major investment in infrastructure projects which, given phenomenally low interest rates always made sense whatever George Osborne claimed.
Borrowing targets will be jettisoned and there will not be a surplus within this parliament. The emphasis will be on creating the basis for future economic growth and job creation; especially in parts of the country in which there appears to be disgruntlement against the impact of austerity manifested in poor and temporary job prospects and reduced wages leading to a drop in living standards. That people find it difficult to pay rent is hardly surprising.
As many have pointed out, look at the increase in so called ‘food banks’ in recent years. Even though this is a Conservative government, there is recognition that people can only be subjected to so much of the pain of austerity. That London has been all but insulated against austerity comes as no comfort. Moreover, it is perfectly possible that the city may lose business due to large financial firms relocating as well as the EU imposing tariffs and barriers that will reduce growth.
Fascinatingly Alex Stubb who was a former prime minister and finance minister of Finland has spoken of Brexit being a seminal moment in Europe’s recent history. Speaking on Bloomberg TV he compared it to 1952 moment when the Coal and Steel Community was created, the genesis of the EU and 1989 when the ‘Cold War’ between the East and West ended.
Stubb, who is seen as a veteran of the Eurozone debt crisis, believes that the UK’s decision to leave the EU will follow a three-stage approach which consists of crisis, followed by chaos eventually leading to a “sub-optimal solution.” As he acknowledges, it will be a very “long, long process” and as to what will result he does not know.
All we can guarantee is that uncertainty will continue with the attendant repercussions for the economies of this country, Europe and, increasingly it appears, the world.
Dr Steve McCabe
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