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Fri Dec 13, 2019, 06:09 AM

Brexit Brokenomics: The Economic Consequences


... In the short term we could be looking at a substantial increase in unemployment (though from a very low level now), depressed wages and lower investment. Much of the “pent-up” investment supposedly waiting to “unleash Britain’s potential” would be cancelled. Key sectors that rely on EU markets and European Union supply chains would suffer most grievously – cars, aerospace, pharmaceuticals, agriculture and the City and financial services.

Geographically, places such as the northeast and West Midlands that depend on manufacturing (and in which many districts voted Leave) would be hardest hit. Northern Ireland (which voted Remain) may find it derives some advantages from its anomalous position of staying in aspects of the EU customs union or single market. Overall, the continuing contraction in business investment is especially problematic, because it implies slower productivity growth for the future, which in turn means lower economic growth, wages and the funds to pay for (expensive) improvement in public services such as social care...

... The usual adjustment mechanism for an open economy in such a situation is via the exchange rate – the value of the pound against other currencies. Remember, too, that the UK is even now running a large trade deficit at about 6 per cent of GDP. Another sharp depreciation of sterling seems inevitable, to make UK exports more competitive. However, that will mean higher prices for imported goods and, possibly, higher wage claims (and higher minimum wages) and the sparking of an inflationary spiral – how the Bank of England reacts to these trends will be crucial. If they decide to ramp up interest rates to choke off inflation that will, in turn, hit the housing market, property values, investment and consumer spending...

... The few winners under such a set of circumstances would include those individuals and companies who derive much of their income or own assets denominated in foreign currencies, and those who are most able to reform their operations to make them globally competitive in a hostile trading environment...

How to compete in a hostile environment? By behaving very badly yourself.

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