Since the referendum on Brexit in June 2016, the dynamics of the British economy have been shrinking. Evidenced by the slowdown in growth in 2018 to 1.4%, the slowest pace since 2012 and a pace, as in 2017, slower than the Euro zone and France.
To fully appreciate the divergence between the United Kingdom on the one hand and France and the euro zone on the other, I calculated a trend starting in 2013 (beginning of the recovery everywhere) and ending in the second quarter of 2016 at the moment of the referendum.
The trend of each country is then extended while retaining the initial parameters. I then calculate the deviation (in%) of GDP to this trend. These are the three curves on the graph.
The UK curve is 2.5% below its pre-referendum trend. The cumulative difference since the choice of the British reflects the cost associated with it even before the Brexit is formally established (March 29, 2019 theoretically).
At the same time, the acceleration of growth in the eurozone and in France throughout 2017 marks these two countries, above their trend. France is 1.7% above the trend and the euro zone 0.8%.
Despite being the UK’s largest trading partner, European expansion has not benefited the UK. This is a very disturbing element.
Nevertheless, the expected slowdown in eurozone growth, beyond the effects of Brexit, should weigh on the economic situation across the Channel and increase, ex post, the cost of the referendum.
After the vote of the Parliament, there is a majority for a deal. But Theresa May will have to renegotiate de Irish backstop.
The EU now has to agree to reopen the negotiations. For that, Theresa May will have to offer interesting things that are not only to the advantage of the United Kingdom. It’s going to be complex for Theresa May but also for the EU which will have to remain united. The UK government should not end up dividing Europeans. It was their mode of negotiation at the beginning. Since everyone is now afraid with a no deal there may be a risk for this strategy to succeed. The EU spokesman accept to postpone the deadline but does not want to renegotiate. The game will be interesting in the coming days.
Theresa May’s defeat in the British Parliament is historic with a gap of 230 votes (432 votes against 202 against).
The text that was validated in November by the British government and the European Commission will not be the canvas of the new European architecture.
What can happen? We all have in mind a scheme with all the alternatives.
Beyond Plan B that Theresa May must present in three days and that she obviously does not have, the United Kingdom will enter the land unknown because there is no trivial solution.
The question is who will carry the British government because the general idea is that Theresa May has to leave. Indeed, can Theresa May still be credible after her terrible defeat? Will she have the will to stay as Prime Minister? What can she bring now when she has put all her strength into the battle?
We can imagine general elections but who will take the 10 Downing Street? Theresa May? A brexiter? Or Jeremy Corbyn? The first has a problem of credibility, while no brexiter wants power as long as the issue of Brexit is not settled and the British left does not wish Corbyn for this job because he is too extreme and probably too volatile. This raises the question of who could take responsibility for a second referendum.
One can imagine an extension of Article 50 but why? The EU will not move, and rightly so, and the British have already tried to negotiate the best deal for them. The only reason that pushes in this direction is the idea that in fine reason will prevail and that the British will renounce Brexit.
There remains the unilateral renunciation of the procedure which would be carried by Parliament or a Brexit without agreement.
The uncertainty remains and will not be resolved for long as Theresa May will probably cling to her position when she no longer has the hand
This post is available in pdf format Federal Reserve – My monday Column
The Federal Reserve meets on September 25 and 26, and a 25bps hike to the fed funds rate is expected, putting the effective rate in a range of between 2% and 2.25%, with another hike expected in December. The Fed now seems to agree on these four monetary tightening moves for 2018, so the next big question is 2019. During the latest update of economic and financial projections from the members of the Federal Open Markets Committee (FOMC) in June, three interest rate hikes were expected in 2019. How can we get a clearer idea of what’s to come?
Four interest rates are now confirmed by the Fed. I had mentioned this scenario at the start of the year due to the White House’s implementation of expansionary fiscal policy and I have not changed my mind: the hike to the fed funds rate is just a way to iron out the imbalances caused by this policy that seeks to fuel domestic demand.
This domestic momentum reflects the impact of two factors: the first is the direct effect of tax cuts and rising public spending, and we can see the positive effects of this twofold approach for demand; the other component is trade policy that aims to use domestic production to replace imports, thereby sharply driving up demand for companies’ goods and services.
So the White House has adopted a two-pronged approach: on the one hand it bolsters domestic demand and the other it directs this additional demand towards US companies rather than imports.
This internal momentum will have at least two direct consequences: the first is the risk of inflation because demand is strong and because of higher import duties. Continue reading
The UK GDP growth was at +0.4% during the second quarter (1.5% at annual rate). The carry over growth for 2018 at the end of the second quarter is 1%.
I have updated my graph on the deviation from the pre-referendum trend. There is no catch up while Eurozone countries are still above the trend. The impoverishment of the United Kingdom after the referendum continues. Not sure it was a good idea for the Bank o England to increase its main rate this month. The increased uncertainty on the Brexit negotiation will not allow a rapid reversal as uncertainty is the main enemy of long term investments, those which improve productivity.