Brexit fallout begins.
Published 8.18.2016LWRAS continues to monitor the fall out from the United Kingdom's (UK) vote to leave the European Union (EU).
Brexit factored into Moody's latest outlook report. Moody’s doesn’t think the UK will enter recession, but it will slow down. The rest of the EU is supposed to stabilize as well. The lower pound supports economic growth too. The prediction is for 1.5% growth in 2016 and 1.2% growth for 2017. No drop in housing prices is predicted, though this one might be failing even now, at least in London according to coverage I saw while in the UK.
The Moody's report covered more than Brexit. Moody’s outlook for China is improved too, with a prediction of 6.6% for 2016 and 6.3% in 2017. Of course, growth in China is particularly difficult to measure and predict since it is very much dependent on government manipulation— both of policy and numbers. Growth in the other G20 emerging markets is projected to be 4.4% for 2016 and 5% for 2017.
The US is seen as a risk factor. Moody’s wants the Fed to raise interest rates, because that would mean the economy is in good shape. Trump is not named, but is alluded to, as a big risk to the economy of the US.
Claims that Brexit will be delayed or avoided are "idle chatter." There is some evidence already that the three chosen to chart the Brexit course are not play9ing well together.
Responsibility for delivering Brexit is split between three cabinet posts and departments: Mr Johnson at the Foreign Office, Mr Fox at International Trade, and Mr Davis, Secretary of State for exiting the European Union.
The latter two departments were created in light of Britain's vote to leave the EU in the referendum on 23 June.
Fox wants to take the lead. Labour complains of potential turf wars, and that seems a reasonable critique, to this far away observer.
The UK's trade deficit may decline, though this isn't necessarily the good news it should be.
The U.K.’s decision to leave the European Union could make it harder for the country to sustain its large and persistent current-account deficit, which means it brings in less from overseas trade, investment income and remittances each year than it shells out to foreigners.
Financing the shortfall requires the U.K. to borrow from abroad or sell U.K. assets to overseas buyers, a tendency Bank of England Gov. Mark Carney has said makes the U.K. dependent on “the kindness of strangers.” The question now facing the U.K. is whether foreigners will continue to be as willing to keep plugging the gap, particularly as the U.K.’s future access to the EU’s vast single market is unclear.
If they can’t borrow to support their spending, they will have to spend less. And that will likely hurt the very people who voted for Brexit. A weaker pound will boost overseas earnings, but could increase inflation and prices for imported goods rise.
Some perspective (The emphasis added is mine.):
The U.K. had a deficit in 2015 that was equivalent to 5.4% of annual national income, the widest among comparable advanced economies. The U.S. ran a current-account deficit last year of 2.6% of income. Germany, China and Japan have long run persistent surpluses.
Yet in the US, pundits would have you believe the sky is falling.
The UK is much more entangled than the Brexiteers led everyone to believe. Brexiteers like to point to Greenland, which left once it was free of the Danes. But even though Greenland was less entangled, and a much smaller economy, it took three years. The UK has two years from the time it invokes article 50.
Members of the EU aren’t allowed to negotiate independently with the Brits, Brits will have to deal with the EU and thus the same regulations. The EU represents about 40% of UK export, more than the next 9 trading partners (the U.S., Switzerland, Japan, China, Canada, Russia, India, Hong Kong, and Brazil) combined. Brexiteers are also floating the idea of joining the European Free Trade Association (to which Norway belongs) because that allows a country to enjoy the benefits of the single market while not being a member of the European Union. But the UK’s economy would swamp that group, and the Norwegians aren’t thrilled about that.
New tariffs will have to be negotiated too, and none of the troika Prime Minister Theresa May assigned to chart the path to Brexit has any experience doing so. A simple solution would be to impose no tariffs— and watch British manufacturing disappear.
Not that Brexiteers are admitting gloom. There is the possibility that the UK will be another special case, rather than being Norway or Greenland, they’ll be their own case. This is balloon was floated by a German lawmaker, not a member of the EU.
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