The Strategist

British economy finds itself in limbo

02/19/2019 - 11:39

The growth of the British economy in 2018 was 1.4%, the National Statistical Service reported: “Such low growth rates were observed only in 2012, and lower growth rates were observed only in 2009.” Investments of the companies have been falling for the fourth quarter in a row, and many began to prepare for tough Brexit. Not only European, but also American corporations sounded very worried about British problems.

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Oast House Archive
This year the situation may become even more complicated as just over a month and a half remained until the official Brexit. In the event of a UK withdrawal from the EU without an agreement with Brussels, import duties determined by the WTO rules will take effect. In this case, the economy in 2019 could survive a recession, the Bank of England warns. The promises to conclude bilateral agreements on freedom of trade with many countries, generously distributed by Brexit supporters before the 2016 referendum, have not yet been fulfilled. Although the UK concluded such an agreement with Switzerland on Monday, it was not yet possible to reach agreements with the overwhelming majority of trading partners, including the largest ones.

The situation in the British economy became even more complicated by the end of the year due to the remaining uncertainty: Prime Minister Theresa May agreed to the Brexit conditions only at the end of November. She wanted to submit her plan for parliamentary approval in December, but postponed the vote to January because of the threat of failure (the plan was rejected in the new year). As a result, in the fourth quarter, GDP grew by only 0.2% compared to the third quarter, when it added 0.6%. And in December, GDP fell by 0.4%.

“Uncertainty due to Brexit has already caused tremendous damage to production, investment and jobs,” said Mike Hawes, CEO of the Society of Motor Manufacturers & Traders. According to the organization, in 2018, foreign investment in the British auto industry reduced almost twice to 588.6 million pounds ($ 761.8 billion).

Some large companies, especially financial ones, began to prepare for Brexit as early as 2017, but many realized it only at the end of 2018. According to a survey of more than 200 British firms conducted by the Bank of England, half are implementing plans in case there will be no transitional period after March 29.

Problems may arise with American companies, follows from their statements published in recent weeks. The low pound rate after Brexit "may adversely affect ability of the British government to acquire our products," warned arms manufacturer Lockheed Martin. Expedia, an online travel company, said Brexit could have a “significant and negative impact” on its business. Food producer Mondelez warned: "In the event of interruption in our supply chain, introduction of tariffs and devaluation in the UK can have a significant impact on our consolidated revenue, profit and cash flow."

To avoid the negative impact of import duties, the British authorities promised to negotiate free trade with other countries. The agreement with Switzerland signed on Monday will allow British exporters of cars to avoid duties of up to 8 million pounds per year, aluminum exporters - up to 4 million pounds, precious stones and metals - up to 4 million pounds, the Trade Department said. In 2017, the trade turnover between the countries exceeded 32 billion pounds. However, now in the framework of 40 agreements with the EU, the UK has a free trade regime with 71 countries. So far, in addition to Switzerland, the country was able to agree on its preservation with the Faroe Islands, Israel, Chile and several other countries in South America. In January, Commerce Minister Liam Fox complained that, despite UK proposals, other countries did not want to prepare for a tough Brexit.

There is no point in expecting a revival of economic activity in the near future, according to John Hawksworth, chief economist at PwC: “The first data says that growth in January remains very sluggish. This suggests a further slowdown in Q1, as companies are postponing large investments until the fog of uncertainty around Brexit dissipates.”