WEEKLY COMMENT 13-04-2017
By Barry Edwards
World Economy and Brexit
While the UK has been concentrating on Brexit, the economic outlook around the world is becoming quite positive especially since the EU is finally starting to respond to ECB quantitative easing programme. Growth in Europe is estimated to be around 2% this year and unemployment is starting to come down although youth employment is still high across southern Europe. America and Asia are both growing at a good pace and developing nations are experiencing higher growth than they have for some years now commodity prices are recovering.
Although there are a few caveats to watch out for the general overview is encouraging and it looks like this growth phase will continue for a few years yet. Unfortunately, the only negative outlook is the UK as the statistical data are beginning to turn downwards as the effects of higher oil prices and the fall in the value of Sterling hold back the rise in incomes. The UK economy is very dependent on consumer spending and research is showing that people are becoming more cautious about the effects of Brexit.
Many commentators are predicting that UK growth will decline faster than the official estimates and we could see the economy flirting with recession if the negotiations do not go well over the next two years. The continued growth of the world economy should prevent an actual recession but the outlook is forecast to be much lower growth for a few years until the Brexit outcome is known according to some economists.
The thinking is that the fall in Sterling has been enough to counteract any tariffs that may be imposed on manufactured products making them a little cheaper than they were before the referendum. This should mean that European trade is not affected too much and it is likely to be the products that are particularly price sensitive that will suffer. The main area of concern is financial services but there has recently been some discussion amongst the lawyers that there are already in place rules and regulations that allow non EU members to provide services providing those countries have compatible arrangements. That means there is no real restriction on the UK providing services to Europe unless the negotiations impose some new terms that change the status quo.
Therefore, the impact of Brexit may not be as dramatic as first thought except that many companies are undoubtedly going to delay investment decisions in the UK until the terms of the deal are known. Foreign direct investment will certainly suffer until the terms have been agreed which has been an important part of the capital expenditure in the UK. The real unknowns about Brexit are all to do with this topic which will determine the potential of the economy for many years to come. How the world views the UK as a place to do business is at the heart of the matter and this is difficult to predict while there is still much uncertainty.
If the world economy does not expand at the rate forecast there could be serious repercussions on the UK economy. Some commentators are very pessimistic about the Chinese economy since the massive amount of debt that is building up is likely to cause a major problem that can only end with a recession. If this did happen the whole world will notice the effect and the UK could be in serious trouble since the Brexit situation could increase uncertainty.
The other possible problem that could occur is that the Trump presidency does not deliver on the big infrastructure investment plan which is the basis of the growth forecasts for the USA. At the moment, there is nothing to suggest that this will be the case but many economists are doubtful Congress will allow Donald trump to increase government debt to the levels required to pay for it. That would mean that private funds would have to be involved and there is some doubt that would be forthcoming in the amount needed.
The Chinese and American potential problems hopefully will not happen but there is some risk that the world economy could suffer if a major unexpected event did occur. Unfortunately that would make the Brexit affect a real problem for the UK so we are dependent to some degree that nothing untoward happens to upset the world economy. Let’s hope we experience a good economic climate for the foreseeable future.
That’s all for this week, more observations next week.