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Daily Picks Thursday: The Price of Brexit

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The Price of Brexit

From: http://cep.lse.ac.uk/pubs/download/cp528.pdf

  • Brexit is yet to happen, but the economic effects of voting to leave are already being felt.
  • Uncertainty has increased. It remains unclear what exactly the UK’s relationship with the EU will look like after Brexit and how policy-making in the UK will change. This uncertainty makes businesses less willing to invest in risky new projects, leading to lower output growth.
  • The referendum led to a decline in the expected future openness of the UK to trade, investment and immigration with the EU. This has made the UK a less attractive destination for foreign investment and reduced the incentives for firms to invest in expanding UK-EU trade.
  • The depreciation of sterling suggests that financial markets have lowered their expectations of future UK economic growth.
  • A fall in the pound increases the cost of imports into the UK and makes UK exports to other countries cheaper. More expensive imports drive up the cost of living.
  • It is estimated that the Brexit vote increased inflation by 1.7 percentage points in the year following the referendum.
  • Consequently, higher inflation has led to a decline in real wages and a fall in living standards. Estimates imply that by June 2017, the vote to leave the EU was costing the average UK household £404 per year.
  • The fall in the pound gives UK firms a competitive advantage in foreign markets, which could lead to higher exports. However the likelihood of future increases in trade barriers between the UK and the EU may make firms reluctant to invest in increasing their export capacity.
  • By the third quarter of 2017, UK GDP was 1.3 percentage points lower than it would have been if the UK had not voted for Brexit. This implies a decrease in output of approximately £500 million per week during the quarter.
  • Prior to the referendum, there was a broad consensus among economists that leaving the EU would, in the long run, reduce UK living standards. It is too soon to evaluate the accuracy of these forecasts and as time passes, we will learn much more about how the Brexit vote has affected the UK economy.
  • But even before Brexit happens, the evidence on inflation, wages and output already shows that the UK is paying a price for voting to leave the EU.

Britain’s economy has slowed to a standstill, largely because of Brexit

From: https://www.economist.com/britain/2018/06/20/britains-economy-has-slowed-to-a-standstill-largely-because-of-brexit

  • Britain’s economy has gone from a leader to a laggard internationally, as GDP growth has slowed sharply.
  • The monetary-policy committee (MPC) of the Bank of England was expected to leave its benchmark interest rate on hold at 0.5% as the economy is deemed too weak to cope with higher borrowing costs.
  • The economic impact of the vote for Brexit is turning out to be less of a sting that was initially forecasted and more of an ache.
  • Although inflation has fallen from its recent peak of 3.1%, real wages are still barely growing. Today the average employee’s pay-packet is roughly 3% smaller than might reasonably have been expected in June 2016, when real wages were moving upwards.
  • Across the whole economy, that adds up to around £350m a week in lost earnings. Growth in household spending, which accounts for some 60% of GDP, has slowed.
  • In the first quarter of this year GDP rose by just 0.1%, the slowest rate since 2012. Poor weather at the start of the year hit the construction industry but overall had only a “limited” effect on the economy.
  • More importantly, the world economy is slowing. Britain’s exports have dropped for the past two quarters.
  • There is little chance of the economy bouncing back soon. Consumer confidence remains low. Businesses have only modest plans for investment in the coming months.
  • In 2018-19 the government appears to be ramping austerity up again as it seeks to close its budget deficit despite a new promise to spend more on the health service. Britain seems to be trapped in a period of low growth and Brexit has not even happened yet.

Bank of England chief economist votes for rate rise, boosting chance of Aug hike

From: https://uk.reuters.com/article/uk-britain-boe/bank-of-england-to-keep-rates-steady-markets-look-for-august-hint-idUKKBN1JG3KB

  • The Bank of England (BoE) bolstered expectations that it will raise rates for only the second time since the financial crisis at its next meeting in August.
  • The central bank also set out new guidance on when it might start to sell its £435 billion of British government bonds, saying this could come once rates have reached around 1.5%.
  • The BoE’s Monetary Policy Committee (MPC) voted 6-3 this month to keep rates at 0.5%.
  • Chief economist Andy Haldane is calling for rates to rise to 0.75%, due to concerns that recent pay deals and labour demand could push wages up faster than expected.
  • With unemployment at its lowest since 1975, the BoE says the economy is running near full capacity, and that the longer-term direction for interest rates over the next two to three years is likely to be up.

Trump’s Ace in the Hole in Trade War: A Strong Economy

From: https://www.nytimes.com/2018/06/20/business/economy/trump-trade-economy.html

  • The American economy has picked up speed and is now on course to expand this year at the fastest rate in more than a decade.
  • That acceleration gives President Trump a stronger hand as he contemplates more tariffs and takes an increasingly confrontational approach with China, Canada, Mexico and other trading partners.
  • Economists warn that the President’s clout is limited and that his attacks on the trading system could dampen the outlook not just in other countries but also domestically.
  • Trade wars could “eat away at trend growth” by reducing G.D.P. by a fraction of a percent a year. That might not seem meaningful in any given year, but compounded over a decade or two, it could leave the economy noticeably short of what it might otherwise have achieved.
  • Federal Reserve Chairman, Jerome H. Powell, has also noted those risks. “Changes in trade policy could cause us to have to question the outlook,”.
  • The United States remains more insulated from a trade shock than other countries. Exports account for just 12 percent of American gross domestic product. That’s the lowest share among the 35 members of the Organization for Economic Cooperation and Development.

Trump's Metal Tariffs Have Yielded More Than $775 Million So Far

From: https://www.bloomberg.com/news/articles/2018-06-21/trump-s-metal-tariffs-have-yielded-more-than-775-million-so-far

  • The tariffs President Donald Trump imposed in March have generated $582 million from steel imports and $195 million from aluminium as of last week.
  • The combined total is expected to top $1 billion within the next six weeks.
  • Trump said "One thing no one talks about are the money pouring into the treasury. These tariffs are billions and billions of dollars."
  • Companies can win product exclusions from the metal tariffs after requests are posted online for 30 days for any objections if the needed raw material is not produced in the U.S. in a sufficient amount or quality, or for a specific national security reason.
  • As of Monday, there were 20,000 exclusion requests on steel duties with almost 1,800 objections posted, and 2,500 aluminium filings with about 50 objections posted
  • There is a high probability that relatively few of those will be granted because many lack substance or have well-grounded objections posted against them.
  • Senators criticised the duties as the wrong approach that draw harmful retaliation, hurt the American economy and businesses with higher costs.