THE BLOG

UK Economy Fights Back Despite Brexit Fears

01/11/2016 14:52

'Brexit means Brexit and we're going to make a success of it.' The Prime Minister was adamant that leaving the European Union wouldn't be a disaster and that there would be bright future ahead. A few weeks ago we found out that Article 50 will be triggered no later than March 2017, starting the formal process of leaving the European Union. Whilst there was some clarity over when Brexit may actually become reality, whether we are heading for a 'hard Brexit' or 'soft Brexit' is still relatively unknown. A hard Brexit will mean we totally leave the EU with no access to the single market. A soft Brexit means we reach a deal with the EU to have some access to the single market and accept other conditions negotiated, which will aim to have the best of both worlds. The primary and secondary impacts will be very different for each scenario but at the moment we are seeing the primary impacts of the decision to leave the European Union alone, before Article 50 has been triggered. Importantly, the economic impacts have been dominating, with there now being some political stability.

So, what is the state of the economy right now?

Gross Domestic Product (GDP) is a way to measure economic growth and how well the economy is doing. GDP is a way of calculating the combined value of goods and services produced in the country and the value they were purchased at. This can show whether the economy has grown because the output measure represents each sector of the economy. In the second quarter of 2016, from the period in between April to June, the Office for National Statistics reported that the GDP was at 0.7%. This was during the EU referendum campaigning period, where there was uncertainty but expectation that Britain would remain a member of the European Union. Therefore, Brexit would have been a non-existent factor, which would have caused the GDP to be at its rate. In the third quarter, July to September, the GDP was 0.5%. This was calculated as an average between the GDP value of agriculture, production, construction and services. Agriculture was -0.01%, production was -0.05% and construction was -0.09%. Despite this indicating the economy would shrink, the services sector actually grew (0.64%) meaning the combined average of the GDP was 0.5%. This has so far been seen as being positive because some economists didn't expect the economy to grow beyond 0.3% and the Bank of England initially forecasted growth of 0.2%. As a result, the economy has beaten expectation and is in a good position but it failed to match the growth of the last quarter (0.7%), so it could be indicating the economy is now growing slowly.

Interest rates were cut from 0.5% to 0.25% by the Bank of England in August. This means that the borrowing costs (loans) would be cheaper and this would encourage consumers to take out loans so they can do things such as have enough capital to start up a business. However, a low interest rate means that money savers would get less back in return from interest. It is thought that the Bank of England could cut interest rates further in the future but it is unknown if they really will because economic growth plays a large part. Inflation has increased since Brexit from 0.6% to 1%. This means that the price for goods would have increased slightly but as time progresses it is likely inflation will continue to increase with importation costs also increasing in the past months due to the fall in the value of the pound. The current rate of inflation is below the Government's target of 2% and this suggests that at the moment inflation isn't too high but it has risen since Brexit.

Days after the Brexit vote, the United Kingdom lost its top AAA credit rating and was downgraded to AA by S & P and Fitch, who also put the outlook as being 'negative'. The value of the pound fell and this has been perceived to be positive and negative for the economy. It is positive because the deficit would improve similarly with the trade balance. This is because exports would be favoured over imports as it would be cheaper and this could reduce the demand for imports. A negative correlation has occurred, where the pound fell and stock market rose. The FTSE 100 reached a record high in the 7000 mark and this would naturally help the economy.

Overall, the economy has done well since Brexit amid fears that there could be a recession. The economy has grown beyond expectation and the stock market has risen but interest rates have been cut and the credit rating has been downgraded. This suggests it may take some time for the economy to fully recover. However, the next few years are going to be important because the negotiations with the EU will be key in ensuring the economy carries on growing and the actual impact once we officially leave the European Union will determine if there will be a recession or not and if we would have been better off in or out of the European Union.

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