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Here’s what a no deal Brexit would mean for the British economy

  • Capital Economics’ Vicky Redwood examined the potential economic impact of a no deal Brexit on the UK.
  • The UK should skirt around a recession in 2019, but growth would take a major hit, she said.
  • “Although the more extreme warnings about the short-term impact of a ‘no-deal’ Brexit on the economy are overdone, there is little doubt that it could deal a reasonable blow to GDP growth next year,” Redwood wrote to clients on Wednesday.

The prospect of a no deal Brexit reared its head again this week, as the government admitted it is stockpiling food and medicines in preparation for such an occurrence, and Trade Minister Liam Fox told Business Insider that Britain should “leave without a deal” if one has not been secured by the end of the Article 50 period.

Warnings abound about the possibility of shortages of goods, the grounding of flights, and chaos at borders if no deal does materialise, but what would happen to the UK economy as a whole?

Writing this week, Vicky Redwood, global economist at Capital Economics, argued that while “more extreme” warnings about the economic hit of no deal are being “overblown,” a significant impact negative impact could still be expected.

“Although the more extreme warnings about the short-term impact of a ‘no-deal’ Brexit on the economy are overdone, there is little doubt that it could deal a reasonable blow to GDP growth next year,” Redwood wrote to clients.

In the longer run, Redwood said, it is very difficult to predict what the economic impact would be, but there would be significant negatives in the short tem.

“Whether a no-deal scenario had a good, bad, or little impact on the economy in the long run would depend on many things, including how successful the UK was at striking new trade deals and whether there was an exodus of financial institutions from the UK. But the short-run effect would surely be bad,” she told clients.

Redwood did not go into specific detail in terms of forecasts, but said that a no deal Brexit could “plausibly knock a percentage point or so off growth next year.”

One of the reasons for that, Redwood argued, is that no deal would inevitably have a major negative impact on the price of the pound.

“On the plus side, this would cushion the impact on exporters,” she wrote. “But it would also push up inflation, renewing the squeeze on consumers’ real incomes seen after the pound fell following the EU referendum in June 2016.”

Real wages for UK workers dropped significantly in the 18 months after the referendum as inflation rose to 3% but wage growth remained around 2%. Britain is a consumer focused economy, so when regular workers are earning less, and therefore not spending on non-necessity items, the economy at large suffering.

Such an issue could be compounded, Redwood said, by the UK “imposing import tariffs on the EU, raising import prices.”

Furthermore, business leaders have largely argued for the softest Brexit possible, so no deal would likely represent a major dent to business confidence overall.

“Admittedly, the nosedive in sentiment and GDP growth that was widely expected after referendum never happened,” Redwood said. The chart below shows that expected nosedive.

“But that was partly because of hopes that the UK would reach an agreement to replicate the current free trade arrangements.”

Redwood is, however, much less pessimistic than some forecasters, saying that it is unlikely a no deal Brexit will “plunge the UK into recession.”

One reason for that, she said, is that Britain wouldn’t need to pay anything to Brussels on exiting.

“Remember that leaving without a deal would mean that the UK wouldn’t have to pay its (front-loaded) Brexit ‘divorce bill’ of £40bn odd, equivalent to around 2% of GDP. This money could be used to offset the adverse effects on the economy.”

Redwood also sees Britain falling back on WTO rules for trade as “not the end of the world.”

“As far as trade is concerned, reverting to World Trade Organisation (WTO) rules would not be the end of the world. While the UK would face the EU’s Common External Tariff on its exports to the EU, tariff rates are on average low at 4%,” she concluded.

Source: Business Insider UK

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UK consumers trapped in credit card debt for longer than thought

British consumers are trapped by credit card debt for longer than previously thought, according to a study by officials at the Bank of England and the City regulator, as unsecured borrowing reaches levels unseen since the financial crisis.

Analysis by the Bank and the Financial Conduct Authority showed it was common for people to remain in debt even after paying off one of their credit cards, as they shift debts from one lender to another. Previously, Threadneedle Street had believed that credit cards were paid off more quickly, particularly in relation to mortgages.

Nine out of every £10 of outstanding credit card debt in November 2016 was owed by people who were also in the red two years earlier, according to the study.

The analysis follows the rapid growth in personal borrowing on credit cards, loans and car finance, now rising at almost five times the rate of growth in UK pay. Households are finding themselves increasingly squeezed by meagre earnings growth and rising inflation, as the weak pound after the Brexit vote pushes up the cost of imported goods.

Bank data shows personal debts have risen to the highest level since before the credit crunch, reaching more than £200bn – with credit cards accounting for more than £70bn of the total.

Households are also facing a year of stagnant real earnings growth in 2018, which may push them further into debt should they wish to maintain their living standards.

Writing on the Bank Underground blog – where Threadneedle Street staff can air their views in public – the officials said: “Although a consumer may clear their debt on one credit product, it is not uncommon for them to remain in debt as they transfer balances, take out new credit products or draw down on existing credit lines, such as credit cards.”

The Bank has become increasingly worried about the boom in personal debt over recent months, forcing banks to beef-up their financial reserves to protect against any losses. It warned against reckless lending standards emerging after a period of economic stability since the financial crisis, saying Britain’s banks could incur £30bn of losses if interest rates and unemployment rose sharply.

The study found some crumbs of comfort for the Bank, finding that the growth in consumer credit had not been driven by people with poor credit scores – known in the finance industry as “subprime” borrowers. This would help to suggest that the growth in consumer credit has been less risky than feared.

But while the proportion of borrowers with bad credit scores remained roughly the same over the two years to November 2016, officials said there should have been an improvement because of the economic recovery over the same period of time, which points to banks still being at risk from bad debts.

Source: The Guardian

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Don’t count on our independent Bank to stop Brexit disaster

In common with Sir John Major, Denis Healey, the Bank of England’s historian David Kynaston, and former governor (1983-93) Robin Leigh-Pemberton, I had great reservations about the granting of independence to the Bank.

By independence – more precisely “operational independence” – was meant control of monetary policy: giving the Bank the power to change interest rates, as opposed to merely offering advice to chancellors and prime ministers that could be ignored.

We doubters were mindful of the excessively deflationary bent of the Bank during the interwar years. When the Bank was nationalised by the Attlee government in 1946 – a reaction to Labour’s problems with the economy and the Bank’s influence in the 1920s – the Labour peer Lord Passfield said, recalling those troubled interwar years: “Nobody told us we could do that.”

It was with this history in mind that I was so shocked when Gordon Brown, encouraged, indeed ably assisted, by Ed Balls, granted the Bank independence in a first dramatic act after the 1997 general election.

This year sees the 20th anniversary of the granting of independence and, given the depth of the economic problems facing this country, it was a good moment recently for the Bank to hold a public conference, at which Brown, Balls and others were able to reflect on the record of their creation.

It is also good timing that Kynaston’s magnificent Till Time’s Last Sand: A History of The Bank of England 1694-2013 has recently been published.

At the conference, most of the media coverage concentrated on a speech by Theresa May that had little to do with the Bank, but was billed as a defence of capitalism at the end of a week when most of the press had done its best to pillory Jeremy Corbyn and John McDonnell for their leftwing programme.

But the high spot of the conference was a brilliant presentation by Brown, in which he acknowledged what had gone wrong with the original concept.

Few were in doubt that the monetary policy committee had done a pretty good job. The problem had been with the independent Bank’s approach to financial stability, or the lack of it. Inflation has hardly been a problem these past 20 years. It is an open question to what extent this has been due to the central Bank, as opposed to the impact of globalisation and competitive forces emanating from China. Nevertheless, operational independence in monetary policy has worked better than some of us feared; the point was made at the conference that knowledge of the inflation target has probably had a beneficent influence on wage bargainers who, in the past, would assume the worst of the prospect for inflation, and bargain everyone into the kind of wage-price spiral that only ends in disaster.

The governor of the Bank of England, Mark Carney, is threatening a rise in interest rates.
 The governor of the Bank of England, Mark Carney, is threatening a rise in interest rates. Photograph: Afolabi Sotunde/Reuters

But back to financial stability. It was a theme of the 20th anniversary conferencethat the newly independent Bank had been asleep at the wheel, both in the run-up to the onset of the financial crisis in 2007 and the immediate aftermath. In particular, the blame fell on the then governor Mervyn, now Lord, King, for allegedly having placed all the emphasis on monetary policy, at the expense of the Bank’s overall responsibility for the financial system; for the Bank still possessed this function, even though day-to-day supervision had been hived off to the Financial Services Authority.

Brown was scathing about the behaviour of the governor he had appointed, not only for going on about “moral hazard” – ie being reluctant at first to bail out banks for fear it would set a bad example, but also for publicly offering advice on fiscal policy. The deal was supposed to be that the chancellor would not intervene in monetary matters, nor the Bank in matters of public expenditure and taxation– which King did, negatively, when the economy was nowhere near enjoying sustained recovery from the crisis.

All in all, the independent Bank did not emerge well from the crisis, as Kynaston underlines in his book, although he goes out of his way to be fair, noting that some senior officials were not unaware of mounting problems at Northern Rock and elsewhere. Anyway, both Brown and Balls have concluded that lessons have to be learned, and that there needs to be more cooperation between Bank and government in future.

One of the ironies they concede is that, by removing decisions on interest rates, which used to take up a lot of ministerial and Treasury time, the hope was that the Treasury would be able to concentrate more on wider economic policy.

Well, to judge from the state of the economy now, there is a lot left to be desired when it comes to the achievement of a successful economic policy. This was all too apparent last Monday when, at that bizarre Conservative party conference in Manchester, chancellor Philip Hammond devoted his main thrust to attacking Labour, in the face of whose success with the younger generation the Tories are running scared.

But the problems of the economy now are nothing compared with what is to come if our leaders, and the people they are supposed to lead, do not come to their senses and recognise that Brexit has to be stopped. The present Bank governor Mark Carney is well aware of the absurdity of Brexit, but his powers are reduced to damage limitation. Which makes me wonder why a manifest slowdown in the economy now is being met by threats of a rise in interest rates.

This Brexit business is an unmitigated disaster. As a senior European politician recently observed of the British: “It was heroic of you in 1940 to stand on your own against your enemies; it is ridiculous in 2017 to stand on your own against your friends.”

Source: The Guardian