WEB DESK: In a joint communiqué the Group of 20, constituting an international forum of governments as well as central bankers from 20 major economies, stated that Brexit, Britain’s vote to leave the European Union, heightens risks to the global economy but vowed to use all policy tools to boost growth.
However, while the objective was common to all 20 countries yet the methodology would vary from country to country with Germany reluctant to endorse enhanced government spending to boost growth and the US Treasury Secretary maintaining that “it would be a mistake to think about the choice of tools as being either/or when it comes to structural reforms or using fiscal space.” Thus the communiqué left it open for individual members to use all policy tools – “monetary, fiscal and structural – individually and collectively to achieve our goal of strong, sustainable, balanced and inclusive growth.”
The most recent post-Brexit report was released by the IHS Markit Purchasing Managers’ Index (PMI), that surveyed 650 services and manufacturing companies including transport, business services, computing and restaurants and the questions asked were: “is the level of business activity at your company higher, the same or lower than one month ago? And has manufacturing output risen or declined”? The results reflected a fall of 47.7 in July, a reading below 50 reflects a contraction that is estimated at 0.4 percent in the third quarter of the year, the lowest level since April 2009 and as per Williamson, the IHS chief economist, “the only other times we have seen this index fall to these low levels, was the global financial crisis in 2008/09, the bursting of the dot com bubble, and the 1998 Asian financial crisis.” Williamson added that the difference this time around from the previous years is that this time it was entirely home-grown or attributable to the Brexit vote.
It was further acknowledged that the weaker British pound did raise exports as British products became cheap; however the main loss to Britain would be in terms of losing its position as the leader of the European financial market given that EU officials have warned that the UK-based banks and financial firms would lose access to sell services to EU countries if the UK desists from applying EU rules with respect to free movement of people, capital, services and goods.
The loss to the UK would also be in terms of lost merger and acquisitions activity (M&A) as that particular market is all about confidence and credibility – estimated at $338 billion as per law firm Baker and McKenzie. To restore confidence as quickly as possibly may be a sound advice in one sense, however, Theresa May is unlikely to invoke Article 50 this year as (i) she continues to struggle to ensure that Scotland remains within the United Kingdom after its First Minister Nichola Sturgeon warned that she may be compelled to push for another referendum on staying within the UK after the Scots voted overwhelmingly in favour of remaining in the EU as well as; (ii) European member countries, including French President Hollande, calling for Britain to invoke Article 50 as soon as possible.
Be that as it may, there has been a return of speculators in the M&A activity but the actual cost to the UK would depend on which of the three trading models would be negotiated between the UK and the EU: (i) the Norway model that constitutes the UK remaining in the single market, following the EU rules without any say in the rules, paying budget contributions and accepting free movement of people; May’s cabinet is expected to support free movement of goods and services but not free movement of people as it was a major concern for those who voted in favour of Brexit.
However, this model may be opposed by several EU member countries who fear a Bexit contagion within their own countries; (ii) ‘Canada’ model (a bilateral agreement with the EU) which would be the preferred option only if negotiations with the EU on free movement of goods and services though not of people stall – and given that the bulk of the UK trade with the EU is with three to four countries bilateral treaties would be proactively negotiated with these countries that include Germany and France; the US, Australia and China have already indicated that they are open to free trade agreements with the UK; or (iii) based on the World Trade Organisation (WTO) rules without any specific agreement with the EU. This is unlikely to be the way forward for both the UK and the EU.
To conclude, there is no doubt that Brexit would have negative economic global as well as UK-specific implications, however, the duration as well as the potency of these implications would depend on the negotiations which Theresa May has already indicated will not start in the current year.
Source: Business Recorder