Is the United Kingdom ready to bounce Brexit?

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Shadrach   in Banking & Money

Last updated: 30 January 2020, 06:12 GMT

The new UK trading relationship with the EU could negate the short-term boost.

Britains departure from the EU will set the economy on a replacement path that some economists think will improve its prospects, adding a 1 decimal point to the nations rate of growth by the top of the year.

Others fear that the knowledge of a worse trading relationship with the bloc in 2021 will mute any bounce gained by removing the threat of a no-deal departure, leaving the economy stuck in second , persistently hamstrung by Brexit.

Under Boris Johnsons Withdrawal Agreement, which comes into force at 11pm London time on Friday, the united kingdom has negotiated an 11-month standstill transition that maintains existing trading arrangements between Britain and therefore the EU.

But while the UKs exit from the bloc, confirmed by Mr Johnsons decisive election victory last month, has brought a greater degree of certainty for businesses and consumers, the longer-term picture will depend on the type of trade deal negotiated between Brussels and London by the top of the year.

Julian Jessop, fellow at the Institute of Economic Affairs, said: "There will be a Brexit Bounce." Echoing Sajid Javid, chancellor who spoke of "a boost in economic optimism," which he expected to end with "more investment decisions and employment"

He predicted that improvement in sentiment, higher business investment and an increase in sterling easing household finances would all contribute towards 1 per cent more growth than otherwise, raising the annualised rate of growth by the top of the year back above 2 per cent.

The broad optimism of Brexit-supporting economists is countered by their opponents, who are rather larger in number. John Springford, chief economist of the Centre for European Reform, said the expectation of an enormous improvement within the economy from Brexit was silly.

The story that now youve got certainty, investment comes flooding back [doesnt work], he said, because what youve got certainty about may be a pretty hard outcome. this is able to depress activity at companies hooked in to free movement of individuals or frictionless goods trade.

he added.

Probe a touch deeper, however, and these starkly divergent views come much closer together. Economists of all convictions know that there are many uncertainties over Britains departure, many other moving parts within the global and domestic economy and distinguishing the precise Brexit effect at any time in 2020 are going to be monstrously difficult.

The prospect of an outsized public spending stimulus from the center of the year and a worldwide economy that's struggling to enhance amid continued trade tensions and potential new threats like the coronavirus make firm predictions harder still.

The scale of any Brexit bounce also depends crucially on how the hit that the economy took from the 2016 Brexit vote is measured: the greater the estimated damage, albeit temporary, the more the potential gains from renewed certainty.

Economists don't agree on the extent of the damage, with estimates varying from 1 per cent of gross domestic product (£340 per person every year) to about 3 per cent (£1,000 per person).

To help them get a far better understanding, all of them agree that one among the most causes of those losses was the autumn within the value of sterling after the Brexit vote, which raised import prices and inflation but not wages. a replacement working paper from the Centre for policy Research estimates that the Brexit vote increased consumer prices by 2.9 per cent, costing the typical household £870 per year.

This cost would decrease if the pound recovered, lowering prices. So far, however, sterlings effective rate of exchange against the UKs main trading partners at 80.7 is merely 3.5 per cent above its average after the 2016 referendum, and still 8 per cent less than its average within the three years before the vote. Unless it rises much further, the gains are likely to be relatively small.