How has Brexit vote affected the UK economy?
1) Introduction
Brexit is one of the most significant events in the current history of both the UK and the EU. It can be a turning point for both sides, which can naturally lead to an ultimate nightmare. If we sincerely trust the most negative projections of the UK-they include an utter collapse of the economy of the UK and even the separation of some of the countries there-the independent movement in Scotland is extremely strong. Even that citizen of Scotland voted against (55.30%) in the independence referendum in 2014, too many people in Scotland genuinely want to leave the UK and the most crucial fact for the UK represents the trends:
-100% of regions in Scotland voted against Brexit.
-Most of the people of Scotland enthusiastically support their membership in the EU.
-Brexit instantly becomes a total nightmare -the government announced that they will withdrawal the UK until March 2017… now, almost three years later, the UK is still a member of the EU and is currently negotiating another “favorable deal” -the last one is the UK will leave in early 2020 and a transition period until the end of 2020, where the following relationship will be negotiated (I bet a beer that this deal will be not the last one).
Therefore, despite all this chaos and uncertainty, let’s see how is the performance of the economy and undoubtedly does the Brexit affect this?
2) UK’s current and future economic trends
a) How does Brexit affect the British pound?
As we instantly see from the end of 2015[1], the British pound is devaluating in direct comparison with USD. The ultimate result of the historic referendum in 2016 was one of the most devastating times for the British pound in recent years, reaching the lowest point in the last ten years. On the day of the referendum, GBP/USD was exchanging for 1.4879, now almost three years later, in January 2020, GBP/USD is trading for 1.3002[2] or the pound was devaluating with 0.1877 or whooping 12.61%. Unluckily, the Brexit with a combination of this unpredictability about all this situation (Will the UK make a deal with the EU or we will have no-deal Brexit?) affect GBP-what will represent the foreseeable future, no one can make a clear forecast because too many events can happen.
The good news is that from the middle of 2019, after undoubtedly gaining one of the lowest points, GBP showed clear signs of recovery achieving the level of the middle of 2018. The last month was not so favorable, and the decline counties.
- GDP of the UK
Despite Brexit, the British economy is increasing, so Brexit gets not a substantial effect on the economy as most people naturally thought.
-Annual growth (current and future trends)
The significant crush for the UK’s economy is their annual growth- yes, it is still growing, but it is obvious that the annual growth is slower than before — in the past three years before Brexit, their economy increases annually with at least 2%. After the Brexit, the economy is slowing down, close to reaching a little more than a 1% annual growth, which many prominent economists will determine as a visible sign of recession.
If we sincerely believe in the forecasts of IMF, the economy of the UK will increase with 1.4% and in the next four years, the annual growth will be 1.5%.[3]
-Unemployment rate
Despite Brexit, unemployment undoubtedly continues to decrease, reaching a historically low ranking.
The previous report of ons.gov.uk (official statistic service of the UK) was on 17/12/19 and the unemployment level is 3.8%. With the confident prediction of positive annual growth in the next years, we can issue a forecast that can reach a new low probably to 3.5%.[4]
-Debt to GDP
In the practical term of debt, we don’t receive any drastic change because of Brexit- we gained a marginal increase in the debt, but after this, we experienced a slight decrease too.
But if we correctly identify the precise picture, we have a big increment of the debt to GDP -from 62.9% in 2010 to 80.8 in 2019. Even that soon UK will be not part of the EU (if everything goes to the plan), it is a total valuation of the Maastricht Treaty (government debt to GDP must not exceed 60%).
The UK is not the next Spain, Italy, Portugal or Greece but higher debt put the economy at considerable risk. If the British government spends as much as they produce and they are not in a deficit, even four or five years can be enough (depending on the annual growth) to reach a 60% level which is healthy for every economy.
-GDP per capita
From 2010, we get a slight increase of GDP per Capita, but from 2015 we have decreased, with continuing with the referendum of Brexit, as this year was the highest decline with -8.60% in the past nine years. In the next twelve months (2017) the decline continues, but only with 1.70%. In 2018, it was the first year with a positive growth of GDP per Capita in the past four years.[5]
-Inflation rate
After the Brexit, inflation is increasing, which doesn’t mean it is a troubling sign. For many economists, every modest inflation below 2.5–3% is acceptable and small inflation is healthy for the economy.
The UK doesn’t have a problem with higher inflation, so we can bravely say that inflation is over control and even at the end of 2019 is around 1.5% which is in the norm for one modern economy.
-Government Budget
From 2010, the deficit (the government spends more than the economy naturally produces) is permanent and as a direct result of this, we can see that the Government’s debt is increasing significantly -from almost 63% to 80.8 %.
But despite this, we receive two good news:
-The deficit of the government was dropping from -10.2% to -1.8% in 2019.
-Brexit change nothing-the deficit is continuing to decrease and the practical result is that the Debt of the UK is slightly decreased (we mean about Debt to GDP ratio) to 80.8 %.
-Credit rating
In comparison with most of the countries, AA/Aa 2[6] is a very solid credit rating, but after the referendum of Brexit, the credit rating of the UK was downgraded from the three leading agencies (Standard&Poor’s, Moody and Fitch) and most importantly, the outlook is negative.
The essential factor for this is more enormous debt and unpredictability of Brexit -instead of leaving the EU in March 2017(as represent the intention of the current government at that time), now almost three years later, we suffer another delay for early 2020.
When Brexit happens and if we don’t suffer any notable negative impact of it and the debt ratio is decreasing, we can expect the credit rating to be upgraded to stable or positive.
-Business rankings of the UK
No fundamental change in the ranking after Brexit- UK is in top 10 of the best places of doing business in the last 10 years (exception for 2012), and the ultimate result of the referendum change nothing, the UK lose some positions, which regain quickly and the newest ranking of doing business (2020) [7], the UK is on 8th place, the same as 2019, and a better than 2018(9th place).
-The UK inward FDI as a percentage of GDP, 2009–2018
After a record high in 2016, inward FDI continues to decline in 2018 too, inward FDI flows were worth £192.0 billion in 2016, falling to £80.6 billion in 2017 and £49.3 billion in 2018.
If we examine the data from 2016 to 2018, we can assume that the UK lost over £140 billion, but we miss something important- in 2016 the inward FDI was unusually high and despite the decline, the inward FDI has been one of the highest since 2010.[8]
How important is the trade with the EU?
-Trade with EU countries, 1999–2018
As we see from the table, trade with the EU is crucially important for the UK and without a deal, the economy of the UK will confront a harsh reality. In the short and middle term, there are no alternatives to the EU because of the tremendous dependence from the trade with the EU. The good news for the UK is that the exports have been decreasing constantly from 2007 until now -from 50.2% to 45.3% in 2018[9]. The bad news is that the UK is exporting too much for the EU and this export is vital for the British economy. Regrettably, this is not the last bad news for them -the imports from the EU are high too, reaching 52.6 % in 2018 and from 2012 they are increasing every year. Therefore, we can defiantly say that trade with the EU is vital for the UK and leaving without a deal can crumble the economy.
-Trade non-EU countries, 1999–2018
If we survey this table, we can say that we deliver marginally good news for UK-in the last eight-year, the UK has a continues surplus (sell more goods and services that bought) and the trade with non-EU countries is around 50%, but… since Brexit, the exports were decreasing from 56.3% in 2016 to 54.7% in 2018, the imports fall too, from 49.0% to 47.4% in 2018. The trade with non-EU countries is significant for the UK, but it is impossible to replace the trade with the EU. If the UK decides to go to a no-deal agreement with its European partners, it will need at least ten years to transform its economy without crumbling it.
-Trade with individual EU countries, 2018
Let’s see which countries of the EU are the most important trade partners for the UK. If we examine the table, we can briefly say that trade with Germany, France, Ireland, the Netherlands is essential… and most of these countries are not exceptionally favorable for the future trade agreement if the UK leaves with no-deal.
3) Conclusion
What is the economic impact of Brexit over the economy of the UK…it is relatively big, but we can’t provide a clear forecast because Brexit is not a fact yet, but it is however in development (right now, technically the UK is part of the EU), but we can see now, what are the trends? Is the economy booming because of the future leaving or it is collapsing? If we speak frankly, we receive something in the middle, first clear signs of negative impacts- the British pound fell with 12.61% from 2016 EU Referendum(Brexit), the annual growth is slowing down, the credit rating is downgraded with a negative outlook, the inward FDI is falling… on the other hand we have results that show us that the result of the referendum is not absolutely vital for the economy-the unemployment rate is continuing to decrease; GDP per capita bears the first signs of recovery; the inflation rate is stable, the deficit of the government is continuing to fall…
The unsettled negotiations with the EU are already hurting the UK, but not so harshly as many people believed.
It is relatively substantial how the UK will leave the EU-if there is a deal, the negative impact will be little, but if UK leaves EU with no-deal, the consequences can be devastating due to the fact that the trade with EU is over 50% (45.3% of exports and 52.6 of imports).
No-deal will boost the independence movement in Scotland and the chances of a new referendum for independence with the unpredictable result is completely possible.
Source:
[1]https://www.xe.com/currencycharts/?from=GBP&to=USD&view=10Y available 01/2020
[2]https://www.investing.com/currencies/gbp-usd-historical-data available 01/2020
[3]https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/GBR available 01/2020
[4]https://www.ons.gov.uk/employmentandlabourmarket/peoplenotinwork/unemployment#timeseries available 01/2020
[5]https://countryeconomy.com/gdp/uk available 01/2020
[6]http://www.worldgovernmentbonds.com/credit-rating/united-kingdom/ available 01/2020
[7]https://www.doingbusiness.org/en/rankings available 01/2020
[8]House of commons library “Foreign Direct Investment Statistics” by By Matthew Ward released 20/12/19 Number CBP-8534
[9]House of commons library “Statistics on UK-EU trade” by By Matthew Ward released 16/12/19 Number 7851 p.17
