Price for Brexit: Decline in Living Standards
Despite article 50 being triggered on Wednesday, the economy still remains in good health. But there are signs of a slowing down as prices increase, inflation is at its highest, retail sales’ bounce back isn’t enough to recover December and January’s losses, and pay growth is significantly stalled.
A former member of the Bank of England’s monetary policy committee, David Blanchflower, said that the increasing pressure on household incomes is negative for both consumers and producers: “With prices and wages heading in different directions consumers are set to feel the pinch in 2017.” He also added: “It is hard to see much good economic news this month. The Brexit vote is now starting to have major negative consequences and it is only going to get worse.” Since consumer spending has been a driving force of economic growth, the increasing squeezing of living standards will affect the wider economy.
While Philip Hammond has offered a more positive outlook for this year and the Office for Budget Responsibility (OBR) changed its forecast from 1.4% to 2%, there are still many difficulties lying ahead and the biggest is the uncertainty surrounding consumers and businesses’ response to the Brexit negotiations. The OBR has predicted that growth will slow down next year, at 1.6%.
Some businesses are reporting that skills shortages are increasing their costs, as EU migrants are starting to leave the UK. EU banking employees, graduates, construction and public sector workers are noticeably less, according to the Resolution Foundation think tank.
As a former member of the Monetary Policy Committee, Andrew Sentance, highlighted, consumers are starting to experience a tightening of living standards as a result of higher global inflation, and the fall of the pound. He said: “I have been arguing for some time that interest rates should be gradually rising. The problem this year is that the slowdown in the economy could make that more difficult, even though it would be the right policy.” He added: “The MPC will probably regret not having acted earlier as the pound continues to weaken and inflation surges.”
Higher prices, smaller sizes
Cadbury has promised to stay in the UK, but warned that prices might increase or products might become smaller after Brexit. Glenn Caton, the president of the northern Europe division of Mondelēz International, the US owner of Cadbury, said that they would focus on increasing productivity but customers might have to face higher prices.
Caton said: “There are obviously challenges and there are three things that we really care about in the context of the Brexit negotiations. First of all is making sure we have a stable and thriving UK economy. If the economy is growing all businesses benefit from that. The second is ensuring that there is no new, more complex regulation and that there is free movement of goods and minimal barriers to trade. Regulation impacts complexity, complexity impacts costs, as do trade barriers and tariffs. The third area is skills. We have 50-odd different nationalities in our research and development centre in Bournville and we do want security for those people. So we want EU nationals who are working here and living here to have the security that they can continue to do so.”
But if the Brexit negotiations don’t deliver in these three areas, Caton explained that the company will have to adapt.
The hardest hit are places that voted for Brexit
A new research published by Britain’s cross-party think tank Demos demonstrates that parts of the UK that voted to leave the EU are the most exposed to the economic effects of Brexit. Wales, the north-east and east Midlands, for example, will be more vulnerable because of their reliance on EU exports and grants, as well as their use of European workers. Regional support funds from the EU and European labour would no longer be available after Brexit, a factor that would hit certain areas more than others.
The Demos report said that “Despite overwhelmingly voting in favour of leaving the European Union, Wales stands to be the region worst hit by the UK’s departure from the EU.” This is why “Wales is also one of the UK’s two leading exporters to the European Union, with over 60% of its exports going to the EU, and so would be most affected by potential tariffs.”
But among the hardest hit would also be places like London and Northern Ireland that voted to remain within the EU. Scotland, which voted to remain, would be the least affected, according to the report.
The government hopes to minimise the impact of Brexit by striking a free trade agreement, but many believe that it might leave without a deal. If it does, then it would have to follow the World Trade Organisation (WTO) rules which include high tariffs for agricultural products and manufactured goods. The UK has been a member since the organisation was established in 1995. But securing a full membership of the WTO appears to be a priority for many UK industries that are now facing more uncertainty after Brexit.
If tariffs are imposed on British goods, particularly, agriculture, forestry and fishing, mining, quarrying and manufacturing, these would be very high since the UK would be treated as a non-EU member state. The report also said that: “As a result of tariff changes, UK producers of dairy products, confectionery, alcohol and tobacco will be hit with the costliest duties, with the highest tariffs of exports into the EU at 33.5% for dairy produce.” Wales would face a lot of barriers, especially in exporting lamb and losing its EU grants, which are three times higher than other UK parts.
Another report, published by the manufacturers’ organisation EEF (Engineering Employers’ Federation), says that securing no deal would be disastrous for manufacturers because losing access to the single market and the customs union, would leave them with WTO tariffs that could be as much as 5% more on exports to Europe. The manufacturers’ sector accounts for 45% of all UK exports and employs 2.7 million people, so it’s not in their best interests to leave the EU without the certainty and security of a trade deal.
A spokesperson of the government has said that the government is determined to “pursue a bold and ambitious free trade agreement with the European Union as a priority – allowing for the freest possible movement of goods between Britain and the EU. On top of that, leaving the EU will present us with a unique opportunity to strike trade agreements with countries across the rest of the world while our industrial strategy will get the economy firing on all cylinders and prepare us for the future.” As more and more people across the UK feel more pessimistic about life after Brexit, the only possible way is to move forward with the conviction that WTO tariffs won’t be a barrier to financial success or that the possibility of striking a beneficial trade deal is still on the cards.