Economy

Brexit at Close Range– A Macroeconomic Analysis

The United Kingdom has long been one of the highest performing, strong economies of the world. It currently stands as the 9th largest economy based on purchasing power parity and accounts for 2.2 percent of the global GDP, as per International Monetary Fund statistics. The country holds great economic, political, military and cultural influence over the world. Owing to this large influence, it’s needless to say that any change taking place in the social, political and economic environment of the UK, has a large-scale impact on other economies.

The past three years have left the UK with an environment of confusion and turmoil attributable to the Brexit Referendum that took place in June 2016. With a majority vote opting to leave the European Union, an immediate hit on the macroeconomic trends was discerned. This article thus attempts to trace the macroeconomic trends in the Income, Consumption, Savings and Investment patterns for UK’s economy through the years 2013 – 2018, taking a closer look at the years before, during and after the Brexit Referendum.

Pre-Brexit (2013-2015): Accelerating growth

In the years leading up to Brexit, the period demonstrated a fast-paced growth, particularly in the year 2013- 2014, of about 2.8 percent which could be accounted for largely by the relative increase in the final consumption expenditure; with an extremely high household spending of 263.9 Bn Pounds, as well as, by the increased gross capital formation by about 10 percent, as per the Office for National Statistics. Apart from these economic indicators, factors like increased labour productivity during the period as well as increased export revenue contributed to the increasing GDP with the dominant service sector driving this upward trend.

On taking a closer look into the macroeconomic variables forming the GDP, the growing consumption trend during the 2013 – 2014 period could be attributed to the declining rate of inflation (in consumer prices) by approximately 1.5 percent, which increased the amount of real income in the hands of consumers. As we see a rise in consumption, a similar trend was observed in investment or the gross fixed capital formation, which accounted for approximately 16.4 percent of the UK’s GDP.

Attributable to the boom period in the business cycle, the investment patterns depict the accelerator effect, where the increasing GDP trends push other macroeconomic variables, like ‘investment’, in the same direction as the growth. Moreover, the increased GDP would possibly encourage firms to anticipate a higher profit and invest more in inputs. Therefore, the investment pattern follows a similar trend to that of the GDP throughout, considering that most investment decisions rely on GDP.

With that background in place, we can see that the UK was enjoying a boom period of high growth, consumption, and investment right before the Brexit Referendum. However, as we transition to the next, crucial period we can take a look at how Brexit affected these factors.

Brexit referendum (2015-16): A speed breaker

On 23rd June 2016, the Brexit Referendum was held in the UK asking the electorate to vote for either staying with the European Union or leaving it. This referendum resulted in 51.9 percent of the votes being cast in favour of leaving the European Union. This result was the beginning of a series of negotiations between the EU and the UK, leaving the global economy in speculation about the fate of the UK since then.

The GDP figures have since the 2014-15 period portrayed a declining trend up until 2016-17, the crucial period attributing to the Brexit Referendum vote. During this period (2015-16) the growth was only 1.9 percent. This remained at a declining rate until 2017. In this period, the gross capital formation (gross investment) also decreased by 0.29 percent. The domestic savings in this period also fell drastically, representing a recessionary phase where the Brexit Referendum results led to the depreciation of the Pound Sterling which increased the cost of living and in turn reduced real wages, which lowered the proportion of income being saved as well as less proportion of it being spent in consumption. Employment trends during this period were also fairly bleak.

Thus, the period during the speculation of Brexit and the Brexit Referendum results did directly impact the significant macroeconomic variables and thus impacted the rising GDP growth rates as a whole.

Post-Brexit (2017- 18): Slowing but growing

The period post the Brexit Referendum is perhaps even more crucial than the period during the Referendum as the economy is now reacting to the aftermath. Surprisingly, however, the growth eventually picked up the following year, with an increased growth rate of 2.65 percent. GDP reported since then has been slow, but positive despite the Referendum. This positive growth could be attributed to the robust consumer spending that slowly picked up after the referendum vote, and exports which were sustaining the economy. Employment also picked up during this period as unemployment rates fell by 4 percent.

The sustaining consumer spending in the UK is perhaps the most puzzling outcome of the Post-Brexit period. Economists attribute this trend to what is known as the optimism bias- a concept in psychology where there exists a tendency to expect a better outcome and thus act accordingly. Implying that the people of the UK truly view Brexit as a good decision that will have a positive impact on them.

The forecast ahead

Most economists opine that the United Kingdom’s decision to leave the European Union will affect its economy quite adversely. They believe that although the short-term impacts don’t seem drastic and hard-hitting, the medium and long term forecasts will not be this rosy. There is a lot of discourse on the impact Brexit will have on the per capita income of people, where opinions differ based on the form of exit i.e., no-deal – hard Brexit or a soft Brexit. A hard Brexit is speculated to result in a loss of about 57 Bn pounds annually. A soft Brexit, on the other hand, would lead to a speculated loss of about 5 Bn pounds annually. The nature of this exit would also determine its changing impact on trade. Since, as a part of the European Union the members are exempted from trade barriers like tariffs and quotas, leaving the EU would make the UK worse off with regard to trade.

The Brexit Referendum, one of the most important, economically impactful events in these six years, indeed created a dent in the United Kingdom’s economy with a slowdown in virtually all the significant macroeconomic variables. This dent, however, slowly managed to smoothen out to some extent, where we saw that consumer spending and exports lowered the blow of the depreciated currency and a potential plummet in the GDP. In that regard, although the GDP growth seems to be increasing at a slow rate, forecasts reveal that the state of change that the UK economy will go through, due to Brexit, may not lead to sustained growth in the long term. Moreover, this change would be largely impacted by the nature of the exit UK will eventually make.

Picture Courtesy- The Spectator



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