First warning signs appear for UK’s resilient economy

March 27, 2017
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London’s financial centre, The City, will face headwinds if Britain leaves the EU without a negotiated deal/AFP

, LONDON, United Kingdom, Mar 27 – Britain’s economy has for months defied the cataclysmic predictions made by campaigners for staying in the EU 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.

The first nine months since the Brexit vote have been deftly handled by Prime Minister Theresa May, 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 percent in 2016 and could expand by 2.0 percent this year, according to the latest forecasts.

But economists say the positive results are due to the fact that 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.

Top of the rollercoaster

“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 Organization rules for trading with the EU after it leaves, British car exports would face a 10-percent tariff at the EU border.

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 but constituted a key argument for the Brexit campaign and helped explain the vote outcome.

Sectors that depend on low-skilled 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.

‘Gas in the tank’

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.

Consumers are also beginning to feel the effect of a sharp rise in prices due to more expensive imports — a consequence of the devaluation of the pound on currency markets caused by the Brexit vote.

With Britain facing turbulence, finance minister Philip Hammond presented a cautious budget last week that he hopes will give him enough spending power to act quickly if the economy starts to sputter.

Hammond said that “as we embark on the journey that we will be taking over the next couple of years, we are confident that we have got enough gas in the tank to see us through that journey”.

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