A year ago, in one of the most momentous political event of 2016, British voters stunned the world by casting their votes in favour of Brexit - a shorthand word coined for Britain exiting the 28-member European Union – referendum - on June 23, 2016.
The repercussions of this unforeseen outcome were witnessed instantly. Then Prime Minister, David Cameron, who was against leaving the EU, resigned on the very same day of the referendum and Theresa May became the new prime minister.
Many economists and corporates predicted Brexit to lead to economic crisis and start one of the worst recessions the country has ever faced. There were predictions of housing prices crashing; unemployment shooting up; and Britain’s need of an immediate bailout budget for survival.
A year later, we look at how the economy has shaped up and analyse whether Britain is really in doldrums.
Currency, Trade
On the day of the referendum, the British pound witnessed its biggest intraday fall, plummeting to 1.2117, a level last seen 31 years ago. The fall was further accentuated on concerns of Brexit leaving a hefty and permanent economic cost to the country.
The pound did manage to claw back to levels of 1.3 after Theresa May called for an early election in June. Traders were hopeful of May winning the general election with a strong victory but the surprised outcome of hung parliament made traders to book profits. The pound is still languishing, down 13% at 1.29 compared the level seen on June 23 last year.
A depreciating currency is always good for the country’s exporters and the same was reflected in UK exports numbers that surged 11% from £ 44.7 billion in June 2016 to £ 49.6 billion in May 2017.
Currency fall also means rising import costs, which catalyzed soaring domestic inflation making daily needs dearer to UK citizens; inflation has sky rocketed from 0.5% in June 2016 to 2.9% in May 2017- the highest in four years.
UK citizens, however, surprised again with the buoyancy spending post referendum in H2 2016. This helped UK clock 0.5% and 0.7% GDP growth in Q3CY16 and Q4CY16, respectively. Britain grew faster than analysts’ expectations and also avoided a much anticipated recession predicted by a handful of economists.
However, rising inflation trend in the first five months of 2017 began to pinch spenders and led to curtailment of purchasing power. This was reflected clearly in tepid retail sales growth numbers; retail sales grew merely 0.9% in May 2017 (vis-à-vis expectation of 1.7%) and far lower than 3.8% growth reported in June 2016.
Poor retail consumption in H1 2017 also dragged GDP growth for the country in the first quarter of calendar year 2017. UK reported 0.2% growth in Q1CY17 – the weakest growth rate in one year. Growth prospects are looking bleaker in the second quarter of calendar year 2017 after consumer confidence dropped to -10 points, lowest since July 2016 in the wake of inconclusive outcome of the general elections.
Business, Labour
Business confidence, measured by the CBI business optimism, slumped to -47 points in the third quarter of calendar year 2016. However, it managed to recover to one point in second quarter of calendar year 2017. A cloud of ambiguity looms over the business community on how the UK's trade arrangements with EU will pan out. This uncertainty is likely to keep business optimism subdued for more time.
UK unemployment rate remained stable, standing at 42-year low of 4.6% post Brexit. London-based top financial companies don’t think the situation is bottoming out anytime soon; infact, Goldman Sachs (NYSE:GS), HSBC, UBS and London Stock Exchange have already hinted at a wave of pink slips making their way to the market and are relocating staff to locations outside UK. Few companies like Daiwa House Industry Co., Ltd. (T:1925) and Transferwise have already announced their plans, along with its timeline, to shift their base out of London, suggesting the financial hub may lose it sheen.
In contrast, UK car sales have remained buoyant as car production hit 17-year high in 2016 on elevated export demand. Theresa May will have to negotiate trade-deal terms in favour of the auto industry which is having global exposure and integrated EU supply chains. Like finance companies, fear of auto giants moving their production units out of UK is a bigger worry. Toyota Motor Corporation ADR (NYSE:TM), Nissan Motor Co., Ltd. (T:7201) and BMW are sitting on the sidelines waiting for more clarity and will take final decisions post trade-deal decision with EU. FMCG companies have started hiking prices in the wake of depreciating euro as imports get costlier while some companies have shrunken the size of their packages, while keeping the cost same.
Overall, Britain is not in as apocalyptic shape as many economists predicted immediately post referendum. But, a shocking general election outcome will also mean that the country’s economic recovery is far from being out of the woods.