Soft Brexit …or how to do a swift about-turn

In the wake of the UK elections, the ensuing confusion suggests an increasing likelihood of a soft Brexit, as Theresa May does not have a majority and will have to deal with the situation as it stands. However, it cannot, and will not, be quite that simple as this would mean going back on the result of the Brexit referendum.

One source of confusion derives from the fact that British citizens’ image of Europe has changed considerably in the space of a year, and according to a survey by PEW Research Center in Spring 2017, a majority of the population in the UK has a positive view of Europe i.e. 54%, or 10 points higher than this time last year at the time of the referendum.

The idea of a soft Brexit has emerged as a result of Theresa May’s losses at the recent general election. Continue reading

The Bank of England dilemma

Interesting time in the UK as the Bank of England is facing an important arbitrage. There are potentially two types of shocks in the UK.
One is associated with the consequence of the Brexit on the growth momentum. And the other reflects higher inflation rate (above the 2% target).
The BoE meeting this morning has shown that MPC members may have very different views on monetary policy drivers. At this meeting the vote was 5 for rate stability and 3 for higher rates.
Just a reminder: the BoE has reduced its main rate to 0.25% last July just after the referendum on Brexit in order to accommodate the possible negative risk associated with the referendum result.

Two graphs on recent data can illustrate the MPC dilemma.  Continue reading

United Kingdom: After the General Elections

Uncertainty and the risk of instability have dramatically gone up after the general elections. Theresa May’s bet has failed. She expected a triumph but she no longer have an overall majority. What are the consequences?

1 – Theresa May will stay at the 10 Downing Street for the moment and she will form a new government. The coalition with the Irish party DUP will give her the majority. DUP was a hard Brexit supporter.
The main question here is to know for how long she will have a majority. The Conservatives have 318 seats and DUP 10. The total is 328 and the overall majority is at 326. As there are 4 partial elections each year on average, then Theresa May may have a majority for two or three years if the Labour party remains strong and wins some of these partial elections. How will she manage this issue? Continue reading

Economic Performance in the UK?

This graph shows that the United Kingdom has had a very weak performance since 2007, the weakest except Greece.
The real wage rate has decreased dramatically. The question now is that the Brexit will be a negative and persistent shock on the economy and on the labor market. Can we expect a U-turn on the real wage rate with a weaker labor market due to the negative shock and higher inflation? Probably not
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759 treaties to negotiate with 168 countries. The burden of the Brexit is here to stay

Brexit will be long and will have a negative and persistent impact on the British economy. In a recent article from the Financial Times it is said that after the Brexit, after the U.K. will have left the European Union, in 2019, there will be a large number of treaties between the U.K. and other countries in the worlds that will become obsolete. These treaties that will have to be negotiated again are those between the EU and other countries. Being outside EU these treaties cannot apply anymore to the U.K.  

The article says that there are 759 readies with 168 countries that has to be renegotiated. That’s enormous. These treaties are related to trade, to agriculture, to fisheries but also on the authorization of U.K. planes to land in the US. 

Theresa May thinks that this period can be smoothed as it is the interest of all to continue and to renew  current treaties with U.K. replacing EU.   That’s naive and far from being realistic. Others brexiters suggest to come back to treaties U.K. had before its EU admission. That’s absurd. Others countries can be tempted to have new treaties. All this will be complicated and time consuming. It takes between five to ten years to negotiate a trade agreement. 

The point is that probably the easiest part of the Brexit will be the negotiation with Brussels as all the resources will be focused on it. After the Brexit you have to imagine a giant matrix with 759 lines and 168 columns. We cannot anticipate that all the negotiations will go at the same speed and we cannot expect that resources will be equally distributed on every treaty at the same time. 
This means that we have to expect a persistent negative shock on the U.K. economy as rules will change at different speeds in every part of the economy. This will have an impact on potential growth as UK will be perceived as a source of uncertainty for trade, foreign direct investment and many other topics. 

Hard time is coming for the U.K.  Read the article here 

Inflation on the upside in the United Kingdom

The current acceleration of the inflation rate creates a complex situation in the United Kingdom as it weighs on households’ purchasing power.
In April the inflation rate was at 2.7% and the core inflation rate was at 2.5%. The inflation rate has not been so high since the fall of 2013 and november 2012 for the core rate. This is mainly the impact of the depreciation of the currency after last june referendum on Brexit.
A year ago the inflation rate was at 0.3% and the core inflation rate was at 1.2%. This latter magnitude is worrisome as the economy is not growing more rapidly.
uk-2017-aprl-inflation
The main issue is that wages momentum will not follow the inflation profile.  Continue reading

British Risk

The United Kingdom GDP growth will slowdown dramatically during the first quarter of 2017. Retail sales were down -6.1% during the first three months of the year, in contrast with what was seen recently. This reflects the acceleration of the inflation rate and specifically the higher food prices that have reduced HH purchasing power.
As the consumption profile is consistent with retail sales we can expect a drop in HH consumption that will pull down the GDP figure.
This is the first real impact of the Brexit through lower purchasing power. But that’s just a first step
uk-2017-q1-retailsales&consimption