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20 June 2017
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| Britain (The Total Investment & Insurance Solutions) |
When Britain voted to leave the European Union a year ago, proponents
argued Britain's economy was being held back by the slow-growing, dysfunctional
bloc.
A year on, and with the Brexit divorce talks
finally starting, the situation is radically different.
Britain's economy is growing more slowly than
Greece's, its households are getting poorer as inflation rises and the
government is struggling to stay in power. The remaining 27 members of the EU,
meanwhile, appear to have pushed into a higher gear and found renewed vigor
from the election of pro-EU governments like that of France. The Total Investment & Insurance
Solutions
"The tables have turned somewhat,"
said James Nixon, chief European economist at Oxford Economics. "The
European economy is now enjoying a solid upswing and sentiment, especially
towards the EU, is improving." The
Total Investment & Insurance Solutions
The situation could embolden the EU
negotiators in the Brexit talks and weaken the British side, though it is still
far from certain how the talks, which are due to last two years, will play out.
For Britain, it's a role reversal, having
been buoyed by strong growth in recent times — even after the momentous vote on
June 23, 2016 to leave the EU.
Rather than fall into recession in the wake
of the Brexit vote, as many economists had predicted, Britain last year was one
of the fastest-growing economy among the Group of Seven industrial nations.
That was largely due to the sharp fall in the value of the pound in the wake of
the Brexit vote, which made British exports cheaper in international markets. The Total Investment & Insurance
Solutions
The EU, and the 19-country eurozone in
particular, was still reeling from a debt crisis that raised questions over the
future of its euro currency and was struggling to cope with a flow of refugees
seeking sanctuary from the war in Syria. The Brexit vote had raised questions about
the future of the EU and its detractors, including many political parties, were
looking to deliver it blows in key elections in France and elsewhere. The Total Investment & Insurance
Solutions
For Britain, things have clearly gotten worse
this year.
Britain's Prime Minister Theresa May failed spectacularly
to achieve a majority for her Conservative Party in the general election she
called for earlier this month, undermining confidence in her ability to remain
in the top job. And the economy started showing clear signs of worsening.
A 15 percent drop in the pound against the
dollar has pushed up inflation as it makes imports more expensive, causing
living standards to fall as wage increases fail to keep up pace. The
consequence of that is households are spending less — retail sales are growing
at their slowest rate in four years.
Uncertainty surrounding the outcome of the
Brexit talks — such as the possibility that Britain crashes out of the EU with
no deal — is also likely to make consumers cautious. As will the prospect of
higher interest rates from the Bank of England. Last week's policy meeting
showed that three of eight rate-setters surprisingly backed the first increase
in nearly a decade.
The pound's fall has helped exporters by
making their goods cheaper around the world. But the impact of the depreciation
doesn't last long and credit ratings agency DBRS says that whatever the shape
of the Brexit deal, uncertainty "is likely to adversely impact the economy
and the fiscal accounts."
The upshot is that Britain is now at the
bottom of the G-7 growth table. Even Greece, which is just coming out of an
economic depression and is operating under an international bailout, is doing
better, with quarterly growth of 0.4 percent, double Britain's. The Total Investment & Insurance
Solutions
Philip Hammond, reappointed as Chancellor of the
Exchequer by May after the election, is increasingly arguing for the need for
business to be front and center in the Brexit discussions, over and above any
other consideration, such as reclaiming sovereignty or clamping down on
immigration.
"I have said before, and I remain clear
today, that when the British people voted last June, they did not vote to
become poorer, or less secure," Hammond said Tuesday. "They did vote
to leave the EU. And we will leave the EU. But it must be done in a way that
works for Britain. In a way that prioritizes British jobs, and underpins
Britain's prosperity." The Total
Investment & Insurance Solutions
While the situation in Britain has clearly
worsened, it has gotten brighter in the rest of the EU.
Populist politicians in Austria, the
Netherlands and France who had a lukewarm attachment to the EU at best, failed
to make the headway they may have anticipated in recent elections, while German
Chancellor Angela Merkel is widely expected to win again in elections this
autumn. Meanwhile, the region's debt crisis doesn't look like it's going to
flare up again anytime soon as Greece got the money it needed to meet a big
summer repayment hump. The Total
Investment & Insurance Solutions
"The second half of the year now looks
far less threatening," said Simon Derrick, chief markets strategist at BNY
Mellon. The Total Investment &
Insurance Solutions
Perhaps the most important development for
the economy has been the election of Macron as France's new president, and his
party's big success in legislative elections on Sunday.
Macron was elected on a mandate to deeply
reform France's economy, such as making it easier to hire and fire workers. And
he is unlikely to waste much time pushing those reforms through. The French
economy is performing better than at any time in years, which could make it
more palatable for people to accept the changes. The Total Investment & Insurance Solutions
All the signs are that the French economy,
for years a laggard in Europe's economy, has pushed into a higher gear. The
same can be said for the wider eurozone economy, which grew by 0.6 percent in
the first three months of the year. The
Total Investment & Insurance Solutions
Investors are getting more confident about
its prospects, with some funds, including Blackrock and Morgan Stanley,
recommending clients to go "overweight" on European stocks.
It's still unclear how this divergence in
performance between the two sides of the Brexit negotiating table will play
out. The worry, surely for Britain, is that the EU will be able to tough it out
a bit more than it could have done a year ago.The Total Investment & Insurance Solutions
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