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Is the UK Economy at Risk of a Slowdown Due to Brexit Chaos?

Is the UK Economy at Risk of a Slowdown Due to Brexit Chaos?

The meeting of European Union leaders on April 11, 2019, has given new direction to the future of Brexit. The Brexit deadline has been extended until October 31, 2019, after a decision made in the early hours of the meeting. The extension given is longer than that requested for by British Prime Minister, Theresa May. Although this will temporarily prevent a no-deal Brexit, it comes with its own set of conditions for the UK.

Now, the United Kingdom has to participate in the European parliamentary elections, scheduled for May 23-26 or risk leaving the EU without a deal on June 1. The conduct of the UK during its extended EU membership will also be monitored in June.

Despite these regulations, Brexit, deal or a no-deal, will have a number of consequences for the UK economy. Here’s a look.

Impact of a No-Deal Brexit on the UK Economy

If the UK leaves the EU without a trade deal in place, its economy is likely face the disadvantages of a Hard Brexit, along with several other grave implications.

Firstly, Britain will have to pay outstanding EU bills, amounting to a whopping US$51 billion. It will also have to find ways to guarantee rights to EU citizens, settled in the UK. On the other hand, delays at the customs level could result in shortage of food and other supplies.

The UK is already quite vulnerable to this, since the summer drought, due to global warming and the heat wave, has hit food output hard.

The Tariff Trouble

Trade tariffs would be imposed again. They are as high as 22% for orange juice, 74% for tobacco and 10% for automobiles. This would hurt exporters to a large extent, although some of their misery might be alleviated by a weaker pound sterling.

Prices of imports into the UK would also see an increase due to tariffs. Given that a third of UK’s food is imported from the EU, an increase in import prices means higher inflation and a fall in living standards for British citizens.

A no-deal Brexit would mean trade and travel to the island of Ireland could become more complicated. After Brexit, Northern Ireland would stay with the UK but the Republic of Ireland, which shares a border with the North, would become a part of the EU.

Lack of a deal would create a customs border between the UK and Ireland. Each day, nearly 35,000 commuters would be forced to go through customs during their journey to and from work. In addition, some people in Northern Ireland who wish to stay in the EU could start a referendum to reunite with the country of Ireland.

Apart from this, Prime Minister Theresa May has strongly rejected the EU proposal regarding a customs border between Great Britain and Northern Ireland. This is because the UK is Ireland’s second largest export destination. In case of a no-deal Brexit, she would be left with no choice.

Other Problems Awaiting the UK

Britain would have to tackle a host of other issues after leaving the EU as well.

Funding and Fiscal Issues

The UK doesn’t need to make any financial contributions to the EU after Brexit. This can lead to an increase in the development of debt/deficit reduction plans. However, policy makers will still need to think about whether there is a need to recreate some or all of the EU funds, from which the country receives payments at present.

Changes in Regulations

Brexit will lead to an end of EU regulations, which could create problems for UK businesses. There would be a need for these businesses to adapt to different types of UK regulations that could prove to be costly. For public sector organisations, it means making changes in their approach while designing new regulations and identifying the presence of any new freedoms.

In the public sector, certain sub-sectors, such as health and education, which have long relied on the EU market for students and staff, will bear the brunt. While the transition takes place, some departments of the central government will have to see a huge increase in workload.

Foreign Investments

Brexit will impact the decisions of numerous businesses to trade with the UK. This will require local governments and administrators to put in some serious efforts to attract investors locally and regionally.

Also, the UK would find that trading with the EU is more expensive and difficult. There would be an immediate need to increase government capability and capacity, since there are 53 EU deals that need to be replaced, while 72 others are under negotiation.

Impact on the Labour Market

The UK will need to overhaul its migration policies post Brexit. At present, EU citizens have the freedom to stay and work in Great Britain, without any restrictions. This policy will need to be reset by the government. Similarly, various employers in different sectors will need to change their talent policies.

Looming Uncertainty

Uncertainty is expected to be a part of the exit negotiations. Since Brexit will cause a major shift in the UK’s global position, it will have far reaching effects on business. There can be a decrease in investment, economic growth and, in turn, contraction of public sector budgets.

EY Item Club, which uses the Treasury’s model of economy, has decreased its growth projections for the UK economy to 1.3% for 2019 and 1.5% for 2020. It has also stated that growth in GDP in 2018 was artificially high because of an increase in stockpiling by firms, who were preparing for a no-deal Brexit.

How Will a Delayed Brexit Make Matters Worse?

The Bank of England’s forecasts show that the UK is heading towards the longest streak of falling investment in post war times.

Ben Broadbent, a senior BoE policymaker stated, “It’s pretty clear that investment has been feeling the consequences of the uncertainty about Brexit and particularly the possibility of a bad outcome,” while adding that it “makes sense for firms to wait for news if they expect the news to come soon.”

While the BoE has also forecasted a potential rebound, business investment in the next three years is expected to fall short of the levels the UK could have achieved before the most recent delay.

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