British economy still unimpressed by Brexit vote in the fourth quarter

Is the British economy so resilient that it can “swallow” the Brexit shock without suffering any major impairment? One could well arrive at such a conclusion looking at the robust economic trend in Great Britain in the months since the referendum. In the fourth quarter of last year the pace of economic growth continued largely unabated. As the Office for National Statistics reported this morning, gross domestic product recently increased, as during the summer months, by 0.6 percent quarter-on-quarter. With last year’s growth rate of 2 percent the United Kingdom even took the lead among the G7 states as regards growth. These growth figures are “grist to the mill” of Brexit proponents, above all for those who are in favour of a “hard” break with the EU: against this background, the warnings about Brexit’s negative economic effects look like mere scare-mongering.

Consumer-focused services made a particularly strong showing in the final quarter – so consumer spending is again likely to make an important contribution to overall gross domestic product growth. The financial sector also delivered significant growth. On the other hand, the construction and manufacturing industries stagnated. While manufacturing industry was able to benefit from the depreciation of the pound sterling, the oil industry cut back its output significantly. The building boom, which kept up its momentum until well into last year on the back of subsidised “Help-to-Buy” mortgage loans, has now also abated.

But it remains to be seen whether the British economy will also remain as robust as it is. We are rather sceptical. So far, companies in the United Kingdom have apparently not overdone their reaction to the referendum. This may be due to the fact that it has long been largely unclear where the Brexit journey will lead. Will the break be a “hard” or a “soft” one? The speculation has swung sharply from one extreme to the other, apparently leaving a lot of scope for hopes that compromises will be hammered out in the Brexit negotiations that minimise the companies’ need to adjust and hardly affect their business activities.

But this is likely to change following Theresa May’s clear words last week. The British prime minister left no doubt that she intends to lead her country out of the EU completely and is consequently steering towards a “hard” Brexit. It should be noted that May does not really reject Great Britain’s membership of the EU single market or of the customs union. But she has made it clear that she attaches greater importance to the goal of complete national control over migration and legislation than to access to the single market. May says she accepts that these are incompatible with each other according to current EU rules. This is at least consistent and unmasks one of the most important and most contradictory election promises of the referendum campaign. But this makes a “hard” Brexit with all its negative economic consequences far more likely again. Nor is the fact that members of Parliament will also have their say change this fundamentally. After her clear commitment, the prime minister has little leeway to make concessions to the opponents of Brexit in the Parliament without losing face. At most the obligation to obtain parliamentary approval could potentially delay the government’s existing deadline, namely to start exit negotiations at the beginning of April.

We expect, therefore, that economic growth will slow significantly in the course of this year and that it will continue to slow in the coming year. But it is not only the companies – whose investments will be curtailed by locational decisions against Great Britain – that will contribute to this. Consumers are also unlikely to spend anywhere near as much this and next year as in the past. The significantly higher consumer prices due to sterling’s steep depreciation will alone be enough to see to this. On the positive side are the proposals for a transitional phase lasting several years after Great Britain’s exit, which is scheduled to take place in two years. Such a transitional period for the implementation of the negotiation results would spare the UK’s economy suddenly having to face fully different conditions after Brexit and save it from “falling over the precipice.” If Brussels and London can agree to such a transitional phase (which would also be in the interests of the other EU countries), then the pressure to adapt – above all for the British economy – would already be reduced in the coming two years. Growth would then slow only gradually, but not suddenly.

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