Brexit negotiations. Between Uncertainty and Urgency
”If I cannot have you the way I want you, I do not want you at all” Dr. Feelgood
Brexit has been launched. Mainstream consensus is going through the typical phases of anger (“this cannot be”), shock (“only uneducated, old, and fascists have voted exit”), denial (“it will be stopped by parliament or the commons”) and now we approach, slowly, to the phase of acceptance.
And there it is: Article 50.
Daniel Lacalle is a fund manager who holds a PhD in Economics and has a CIIA financial analyst title. He is author of “Life In The Financial Markets” and “The Energy World Is Flat” (Wiley) as well as “Escape from the Central Bank Trap” (BEP). He has been ranked as one of the Top 20 Economists in the World by Richtopia and has over 24 years of experience in the energy and finance sectors.
The first thing we must be is intellectually honest and recognize that the estimates of an economic debacle post-referendum have not happened. The consensus estimated negative impacts if Brexit won the referendum that did not appear anywhere. The devaluation of the pound is nothing more than losing the premium it reached with against the euro on fears of the Eurozone crisis, and GBP-EUR trades at average levels of ten years. All other indicators, in the EU and UK, have been strengthening. Growth and job creation in the UK have been revised upward by the Bank of England and investment banks.
The UK economy continues to grow, with a 13bps increase over post-referendum estimates, UK economic growth for 2017 is now projected to be 1.6% according to FocusEconomics' latest Consensus Forecast. In addition to the recent revaluation of the pound against the euro, we have seen a similar improvement in projections for the European Union, where GDP growth expectations according to FocusEconomics were revised up to 1.6% for 2017 in early-March and revised up to the same percentage of 1.6% for 2018 just last week. Bloomberg's consensus paints an even rosier picture, projecting European Union GDP to come in at 1.8% for 2018.
So all is good, is it not?
The truth is that all this happens because there was already a very independent framework in the UK and a dynamic economic environment that makes the risk much lower. But we cannot forget that the arrival in the US of the Trump administration adds an essential support to the UK that mitigates risks.
The fact that these concerns and doom expectations have not yet manifested does not mean that risks do not exist, especially in the face of a tense, long and hard negotiation in which both sides have very different positions. Add to all this the calls for referendums from Scotland and Northern Ireland. In the UK, oddly enough, many see a separate Scotland as a historic opportunity for Labor to disappear from the options of government in England, as Scotland is a stronghold of the left.
It seems that the process of reaching agreement can last between two and three years, a period that will surely be full of aggressive messages in the media.
The European Union will not want to leave a bad example of weak negotiation in order not to generate a domino effect, as it faces the rise of internal Euroscepticism. If the European Union was smart, it would use this opportunity to strengthen as an area of freedom, flexibility, attractive investment and global trade. If it falls into the mistake of using the excuse of Brexit to advance in what some call “more Europe” -which means more bureaucracy and interventionism-, the EU is bound to fail. More Europe should be more investment, better employment, and stronger growth,
More Europe should be more investment, better employment, and stronger growth, fewer taxes and burdens, not more committees, taxes, and subsidies.
Expect a couple of years of uncertainty, but let’s be honest in narrowing expectations, both optimistic and pessimistic ones.
Exports and imports
UK production only reduced 0.4% using official data, in the first months of 2017 , due to a decrease in the pharmaceutical sector of 0.9% due mostly to the uncertainty of the Trump healthcare plan, not from Brexit.
The UK trade deficit has fallen to 4.7 billion pounds in the three months to January. Exports have grown at the fastest pace in ten years in the quarter, reaching a record high, and imports have also skyrocketed. Therefore, the impact on trade that many predicted is nowhere to be seen at the moment. The UK is one of the biggest trading partners of the EU, and it will continue to be.
The United Kingdom is the second largest net contributor, after Germany, to the EU budget. That cost will have to be distributed among the others, and Spain, for example, would have to pay around 1 billion euros more per year.
An extremely important topic. Net immigration from Europe to the UK has more than doubled since 2012, according to a report by Capital Economics, reaching 185,000 people. Total net immigration has also skyrocketed, reaching more than 320,000 people, compared with a historical average of 150,000, according to the British government.
The free movement of citizens and the rights of EU workers in the United Kingdom and those of the British in the rest of Europe will likely be the ace card used to accelerate negotiations. The UK does not want to outsource its immigration policy to the European Union, as it does not have a clear one or exercise leadership in the face of geopolitical challenges. Be that as it may, the days of the free movement of workers are over, and a policy similar to that of the United States could be expected.
Nearly half of UK exports go to the EU, but -disaggregated- of the 28 countries, 26 have huge trade surpluses with the United Kingdom. What does that mean? The EU, country by country, exports more to Britain than it imports. That is important, especially with the country that has the largest surplus with the UK, Germany.
The UK has a high deficit in trade in goods, but a huge surplus in services. All this means that the exit from the single market can have an impact, but that the solution for each other depends on a fast and specific agreement for the United Kingdom.
With the latest data available, the UK exports 19.4 billion pounds per year in financial services to the EU, a surplus close to 0.9% of GDP. This is a big stumbling block. It is not clear if financial institutions will have a passport to operate with the EU or if the finance sector will face limitations. The United Kingdom originates almost 20% of loans for EU infrastructure projects, according to the City report.
According to Capital Economics and Open Europe, the cost to the UK of the 100 most expensive rules and regulations of the European Union is 33 billion pounds a year. Excessive bureaucracy and high taxes have limited potential growth and investment in Europe, particularly in the past eight years.
If the European Union does not take the initiative and begins to dismantle the bureaucratic ‘leviathan’ it has built, this cost will be a problem for many countries. But then, we must not miss out on the fact that the UK is already one of the leading countries in ease of doing business. Therefore, eliminating unnecessary regulation and bureaucracy is one of the aces up the sleeve to attract investment to the UK post-Brexit .
The European Union accounts for almost 46% of foreign investment to the United Kingdom, mainly due to the purchase by multinational companies of other British companies. This flow is not expected to be reduced and, of course, could be easily replaced. European investment has already reduced in recent years and has been more than offset by other countries.
UK investment into the EU will not likely be reduced due to Brexit. If anything, it will increase, given the opportunity to develop activities within the EU and move part of some businesses abroad.
We are approaching a period of maximum uncertainty, but the opportunity is enormous. The European Union can come out of these negotiations strengthened, learning from its mistakes, reducing bureaucracy and attracting investment and capital. It is also an opportunity for the UK to thrive.
I believe Brexit is not going to be a zero-sum game. The challenges presented are only opportunities. If we take them, it is a chance to grow, be more prosperous, and regain leadership. If the bureaucrats see an opportunity to advance in the wrong union project, consumed by interventionism and high taxes, all Europeans will be guilty of our own failure. I believe that the European Union should leave its cave and become a world leader in trade, growth, employment and investment attraction.
Let us not fall into the mistake of thinking that the European Union is marvelous and the British are wrong, that the union must remain a bureaucratic dinosaur. As they say in England, “hope for the best, but prepare for the worst “, because the combination of arrogance and ignorance is very dangerous.
*Guest blog posts do not necessarily reflect the views of FocusEconomics.
5-year economic forecasts on 30+ economic indicators for 127 countries & 33 commodities.
Date: April 5, 2017
TagsLatin America Company News Colombia Brazil Tunisia Oil Cryptocurrency European Union Energy Commodities Argentina Exchange Rate Trade Eastern Europe Euro Area Emerging Markets Iran United States Greece Mexico Healthcare Sub-Saharan Africa Africa Major Economies G7 UK Spain United Kingdom Eurozone Investment OPEC Russia Economic Growth (GDP) Infographic Japan Base Metals Commodities Inflation precious metals Venezuela TPP Portugal Unemployment rate Germany Gold Nordic Economies Housing Market Precious Metals Commodities Commodities Agricultural Commodities IMF USA Canada Vietnam Bitcoin Forex Italy Turkey Consensus Forecast Ukraine Brexit China Australia Banking Sector oil prices MENA Asia France India South Africa
Analysts see base metal prices rising 7.6% year-on-year in Q4 2019 (last month: +6.2% yoy). Read more: https://t.co/KlgaC9IbxP
9 hours ago
The Guatemalan economy is projected to expand 3.1% in 2019 and 3.0% in 2020. Read more: https://t.co/JdM2ep1Com
11 hours ago
Argentina's inflation is expected to be 29.0% at the end of 2019, which is up 1.2 percentage points from last month… https://t.co/6Z6z1lcdgY
13 hours ago
GDP in Brazil is seen growing 2.4% in 2019, which is up 0.1 percentage points from last month's forecast, and expan… https://t.co/hHt506suN2
13 hours ago
Agricultural prices are expected to increase 5.6% year-on-year in Q4 2019 on solid food demand thanks to the world'… https://t.co/rBF0qJ4clw
15 hours ago
- Canada in 2019: Interview with a Top Economic Forecaster
- Pound Sterling 2019 Exchange Rate: Projections from Leading Analysts
- Expectations for Latin America’s Economy in 2019
- Ethiopia and Rwanda: From Destruction to Development
- Key commodities trends to look out for in 2019
- What drove Gulf neighbors to bail out Bahrain?
- The Four Financial Bubbles and Their Impact on the U.S. Economy
- The Poorest Countries in the World
- Italy: The sick man of Europe
- What does Bolsonaro's presidential win mean for Brazil's economic outlook?
- The World's Top 10 Largest Economies
- In Latin America, taxpayers are tapped to shoulder the burden of a bank bailout
- How and when will the next financial crisis happen? - 26 experts weigh in
- China and Africa: A partnership under the spotlight
- The conditions are ripe for a Global Financial Crisis 2.0
- Uncertainty, instability and fear haunt a generation of Argentinians
- 5 things: What to expect for Mexico's economy in 2019
- 5 things: Brazil's economic downturn and what to expect going forward
- Emerging Market Currency Crisis: Everything you need to know
- Which ASEAN countries are most exposed in the event of a U.S.-China trade war?
- 75 Top Economics Influencers to Follow
- Emerging Markets Economic Outlook 2018 and 2019
- The Faces Behind Latin America’s Key Institutions
- 2019 Economic Outlook for the Top Oil Producing Countries
- Is your cup of coffee about to get more expensive going in to 2019?
- The Economic Implications of an Aging Global Population
- Can the Wisdom of the Crowds predict the results of the 2018 World Cup?
- Railway Mania: The Largest Speculative Bubble You’ve Never Heard Of
- From Riches to Rags: Have Cryptocurrencies Crashed for Good?
- Investment looks to Latin America, but forecasts are not encouraging
- Turkey: Erdogan has cemented his grip on power - now what about the economy?
- How can Latin America’s business environment benefit from technological change?
- Mexico: A look at the past, present and future as elections yield AMLO victory
- Italy’s New Populist Government and the Eurozone: Prelude to a Crisis?
- Latin America moves toward increased integration as U.S. protectionism grows
- How can Latin America increase productivity without affecting the quality of employment?
- How will Saudi Arabia's economy benefit from lifting the women's driving ban?
- Which countries are the most prepared for the upcoming digital revolution?
- India Under Pressure from the U.S. on Trade Policy
- The Story of Steel
- Latin America is the World Leader in eCommerce Growth Despite Serious Challenges
- What the TPP means for trade in Latin America
- Elections in Russia: Analysis and Implications
- Nearly a Third of Latin Americans Have No Right to a Pension
- A Look at Healthcare Models Around the World
- Newly-elected Chilean President Sebastian Piñera faces a myriad of challenges - economic and otherwise
- The Economic Effects of Trade Protectionism
- Regional Disparity: The Dark Side of Inequality in Latin America
- Coal: The story of the world's most abundant fossil fuel
- Gold: The Most Precious of Metals (Part 3)
- Venezuela's Electoral Conundrum
- Trump's 1st Year: 95 Analysts Surveyed on U.S. Economy
- The Latest on China and What's in Store for 2018
- An in-depth look at the Eurozone’s booming economy and the challenges that lurk in the shadows
- Increasing poverty in Latin America takes a breather thanks to improving economic dynamics
- What will be the most miserable economies in 2018?
- Is Spain doing enough to address its high youth unemployment rate?
- Has Latin America gone far enough in reducing barriers to international trade?
- Commodities Outlook: Oil, Natural Gas, Coal, Lead & Tin
- 21 experts tell us what the future looks like for cryptocurrencies and blockchain
- Turkish lira plummets to all-time low on Erdogan’s monetary feud and tense U.S.-Turkey relations
- Copper: The first metal mastered by man
- Nigerian Economy Still Treading Water Thanks to Oil Sector
- The Mercosur-EU Free Trade Agreement: Obstacles & Opportunities
- Elections in Chile: What the results could mean for the economy
- QE’s Untold Story: A Chart That Fed Correspondents Need To Investigate
- Holland’s fragile one-seat majority government targets economic growth at the expense of fiscal sustainability
- South Africa: Economy at a tipping point?
- Latin American Commodities: What’s behind the increase in demand and prices?
- Is the UK really "shackled to a corpse"?
- Spain-Catalonia: 7 economic experts weigh in on how the situation will affect the outlook
- How well is Spain's labor market doing since the crisis?
- Which countries will have the highest and lowest inflation in 2017?
- How vulnerable is Latin America to economic crises today?
- Iron ore facts and common questions answered
- The bulging economic costs of obesity
- How much investment is needed to salvage Latin America’s crumbling infrastructure?
- A Look at the Potential Impact of Brexit on the Dutch Economy
- Emerging Markets Are Kicking Into Higher Gear In 2017
- Why is foreign direct investment in Latin America falling again?
- Are Central Banks Nationalising the Economy?
- Bounty or burden? The impact of refugees on European economies is far from clear
- What’s the future of U.S.-Latin America trade relations?
- Taxes or cutbacks? Latin America's challenge of sustaining spending without causing debt to skyrocket
- Are uranium prices making a comeback?
- Taxing the Economy: Achieving a Delicate Balance
- How will Latin America’s upcoming lengthy election cycle affect the reform agenda and credit ratings?
- How will emerging market economies perform in 2017?
- Chilean Economy in Focus: Interview with Senior Economist of the Chamber of Commerce of Santiago
- CEOs Rank Top Economies for Growth Opportunities
- The Mobile Ecosystem & Latin America's Economy
- Prospects and Challenges for the Global Economy: Interview with Tim Cooper from BMI Research
- How will the Fed reduce its balance sheet & and how will the ECB end QE? - 19 economic experts weigh in
- Thoughts on "unwinding" QE from Frances Coppola
- The Fed and ECB at a crossroads: Unwinding QE
- Spain: The economy that continues to silence the critics
- Latin America: The Most Unequal Region in the World
- The History of OPEC: Has it been a Success?
- FocusEconomics Announces 2017 Analyst Forecast Awards Winners
- Latin America’s rising unemployment bucks nearly decade long trend
- Escape from the Central Bank Trap by Daniel Lacalle
- China's economic rebalancing act: What to look out for in 2017
- Driving Growth in Latin America: Challenges & Priorities
- Is the Global Economy Rebalancing?
- Commodity exporters face challenging times
- Recent Global Events Facilitate Mercosur-Pacific Alliance
- 23 economic experts weigh in: Why is productivity growth so low?
- Mexico's outlook as Trump nears 100-day mark
- Interview with Oxford Economics Senior Economist on implications of the possible outcomes of the French Presidential Election
- The anxiety of the small saver in a world of negative interest rates
- Brexit negotiations. Between Uncertainty and Urgency
- An Economic History of the EU from El Blog Salmón
- Baby Boomin': Implications of high population growth in Latin America
- Survey of International Economists Predicts a Le Pen Defeat in French Elections, Says Macron has Best Economic Plan
- Spain in a global context: developed economy with some challenges
- How much is crime costing Latin America?
- Predictions & Estimates from Economist Daniel Lacalle
- What economy will the new Dutch government inherit?
- “The data is not a true reflection of reality in India” Interview with Société Générale India Economist
- What are the prospects for Emerging Economies in 2017?
- What to expect in Asia for 2017
- Top Economics & Finance Blogs of 2017
- Latam to Resume Moderate Growth in 2017 but Important Risks Plague Outlook
- 4 Key European Elections That Will Impact the Economy in 2017
- How are security concerns and political chaos affecting Turkey’s economy?
- Global growth to edge up in 2017
- Set to breach targets again? Debt and deficit outlooks for Southern European Eurozone countries in 2016 & 2017
- What does Donald Trump mean for the U.S. economy?
- How will emerging markets perform in 2017?
- The economic impact of a break in U.S.-Philippines ties
- Trump election: Base metals surge due to infrastructure plan
- 5 updates on the Venezuelan economic crisis
- Canada: When your neighbor’s house is on fire…
- Short-term pain before long-term gain? A look at French labor reform and economic growth
- Asia: Unremarkable growth & unfulfilled promises?
- How India's latest monsoon is affecting the economy
- Innovation in Latin America: Potential Goes Untapped Due to Weak Economic Conditions
- Russian economy update in wake of OPEC deal announcement
- The Wisdom of the Crowds and the Consensus Forecast
- Can the peso predict the U.S. election results?
- There's no end in sight to the Venezuela crisis
- A Look at the European Union Political Calendar
- Survey of international economists shows uncertainty surrounding elections damaging U.S. growth prospects
- FocusEconomics partners with leading online statistics provider Statista
- China: Recent postive economic data may be papering over the cracks
- Sub-Saharan Africa's 2016 & 2017 growth rates
- The Italian Dilemma: Weak banks pose risk to already faltering domestic demand
- How much money do migrants from Latin America send home?
- The U.S.' (Not So) Mysterious Case of the Missing Men
- What to expect from the G20 economies by 2020
- The Pain in Spain: Robust GDP growth cannot mask the persistent structural deficit