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Brexit's impact on the economy: Uncertainty for business, price inflation and consumer economic expectations on the downside

June 23, 2017

 

The UK correspondent for Spain's International News Agencya, Agencia EFE, Guillermo Ximenis Escriche, has interviewed BiE expert and founder of the consulting firm, Event Horizon, Gordon Colquhoun, about the impact of Brexit on the economy.

 

Comments from the interview were published in Spanish newspaper El Confidencial.

 

You can read the full text of the interview below:

 

How has the British economy responded in the months after the referendum and how could it evolve in the next months/years?

 

The British economy remained robust immediately after the Brexit vote despite many economists pre-June 2016 forecasting of an immediate negative impact on growth and consumer confidence.   

 

The UK economy grew in the final three months of 2016 as Gross domestic product (GDP) increased by 0.7%.    However, The UK economy slowed in the first quarter of 2017 as the rise in the cost of living began to affect consumer spending, with GDP falling to 0.3%.    The slowdown appears to be focused on the consumer-facing sectors which may suggest the impact of sterling’s depreciation.

 

There is evidence that some business investment planning has stalled to a degree with UK Government data suggesting a slowdown at the end of 2016 as businesses try to understand the impact of Brexit on their industry sector.  

 

As the ‘Brexit phoney war’ continues we expect increased uncertainty and higher livings costs will impact negatively on business investment and consumer spending in the near term.

 

How have uncertainties related to Brexit affected the Government finances/budget?

 

The performance of the UK economy is closely associated with the state of public finances.    There has been increased speculation that the economic impact of exiting the EU on the UK economy by 2030 could be GDP around 1.5%-4.5% lower than if we remain in the EU.

 

In the near term, lower or slowing growth in the economy will lead to lower tax revenues which may suggest Government will loosen monetary policy combined with an expansionary fiscal policy aimed at large scale infrastructure projects through public sector investment.    

 

With the prospect of potential Brexit liabilities in the tens of billions of Euros and the overall public sector costs of resourcing Brexit, it is likely that Government borrowing will increase over the next few years.

 

What are the effects of the pound drop for households and companies in Britain? Can a weak pound bring good consequences for the economy in any aspect?

 

From a business exporting perspective data from the Bank of England suggests that business investment growth is likely to be higher in 2017 than previously projected. The stronger global outlook and the level of sterling are providing incentives for many exporters to renew and increase capacity.  

 

For households, the effect of a weaker pound is already making some impact on the High Street - although consumer confidence remains healthy.  The British Retail Consortium (BRC) showed shop prices declined last month at the slowest pace since 2013, with food prices increasing.

With the ‘Brexit phoney war’ continuing the potential squeeze on consumers remains considerably slower than previously suggested before the Brexit vote last June.   However, we do expect price inflation to increase over the next 12 months to a noticeable degree with consumer economic expectations on the downside. 

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