The Political Economy Review 2017



Brexit… What next for Britain?

The most complex negotiations of modern times are underway, thanks to a decision made last June. Despite Brexiteers believing it is 'all over' and that the 16.1 million members of the 'liberal elite' should accept this, in reality, Brexit has only just begun. But what does this actually mean for Britain? I will make no secret of the fact that I believe Brexit is a totally unnecessary and disastrous decision, but I will seek to answer this question realistically, acknowledging the real challenges and opportunities (however limited) Brexit will bring; although, of course, this is only speculation. Firstly, some of the effects of Brexit have already been felt, which can help us predict longer-term consequences. Last June, pound sterling fell almost 15% against the dollar to a 31-year low, and this depreciation has persisted since. This, as shown by the almost over-night nature of the fall, was a direct result of the vote, as global financial markets feared for the future health of the UK economy. There has, in fact, been a

series of falls almost every step in the Brexit journey; when Theresa May decided to pull the UK out of the Single Market, the triggering of Article 50, and when her snap 'Brexit-election' went wrong and created further political chaos and economic uncertainty. The weak pound has also persisted because of the record-low 0.25% base interest rate, introduced by the Monetary Policy Committee immediately after the Brexit vote last June as a way of easing uncertainty and a predicted slump in demand. International investors have been discouraged from saving in Britain, thus a 'hot-money outflow' has contributed to this depreciation.

With this depreciation, came inflation - most notably cost-push inflation, caused by rising import prices pushing up prices along the supply-chain. This is a real concern as the UK is so heavily dependent on imported goods (one third of all finished goods in the UK are imported) and imported raw materials. UK inflation, according the CPI, now lies at 2.9% (Q3 2017), a massive rise from 0.6% this time last year, with many projections predicting 3.2% inflation for the fourth quarter of this year. This, of course, is a headache for the Bank of England as it is above the 2% inflation target and increasing, but more importantly, it significantly outstrips wage growth, which currently stands at 2.1%. This means that in terms of real incomes, on average, wages are falling by 0.8%, and if you work in the public sector (where the 1% pay cap still exists), wages are falling, on average, by 1.9% per annum. This should be compared to this time last year, when real wages were growing by nearly 2%, a huge shift. This, as Mark Carney confirmed in his Mansion House address on 20th June, is a direct result of the inflationary pressures caused by Brexit; hence, we should not be under the illusion that Brexit will not hurt ordinary working families. And this is set to worsen. Considering what has happened and the fact that the base interest rate is not set to rise in the immediate future, it is easy to predict that higher inflation and anaemic wage growth will continue to squeeze workers' pockets, increasingly so as higher prices continue to filter through supply chains to consumers. Brexiteers will be quick to mention that Brexit has, however, injected much-needed competitiveness in Britain's export market. Pound sterling has long been overvalued, hindering UK exports, and thus Brexit could go some way towards reducing the UK's massive current account deficit. In fact, many predict that the UK trade deficit will fall from 6% of nominal GDP to 3.5% by 2019. Brexiteers even suggest that this is an 'opportunity' to


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