There are three key ways that I see Brexit hitting the UK economy – the first is via the reduced Trade channel the second if is the reduced foreign direct investment and domestic investment channel and the third is the reduced immigration channel. Let me deal with how Theresa’s Mays speech has maximised the chances of a bad outcome for the UK in relation to these three channels:
1) By opting out of the single market and most probably the customs union (to be free to do trade deals with other countries) she will maximise the hit both the trade in services and the trade in goods. Opting out of the single market ensures that our services industries particularly in financial services will lose their passport right to sell financial services into the EU. Opting out of the customs union means that we face potential tariffs from the EU and potentially having to impose tariffs on EU products ourselves. This will mean extensive border checks and will badly affect the just in time supply chains upon which much of manufacturing is based these days. ~The Single Market has considerably reduced non-tariff barriers and opting to leave the Single market will mean that this trend is significantly reversed and let us not forget that the services sector is 80% of the UK economy.
2) By announcing early on in the negotiation process that she is opting for a hard Brexit she has sent an early signal to foreign investors to avoid investing in the UK economy as the UK will most likely have only a very basic WTO type trading arrangement with its biggest export market the EU which currently accounts for over 44% of UK exports. UK investment in large part requires a long term guaranteed access to the EU market and she is signalling that this access will be put at risk as she prioritizes restricting EU labour movements and ending the jurisdiction of the European Court of Justice. This will hit business confidence and with it investment. Furthermore, investment in the UK has to a large extent depended on having access to skilled migrants from the EU which she is proposing to heavily restrict.
3) The UK economy’s dynamics in recent years have to a large extent been driven by the fact that it has been able to import both skilled and unskilled labour from the rest of the EU. The net inflows of labour have helped in many sectors of the UK economy – in producing our financial and non-financial services, in the construction industry, manufacturing and in our healthcare sector. Do not fall for the argument that this has been at the expense of jobs for UK workers. The increased productivity and job creation has been a boost to the UK economy creating extra aggregate demand and extra taxes for the UK government enabling it to improve the UK infrastructure which also stimulates investment and growth.
A final point worth making is that the above three channels, trade, investment and labour migration have in the past reinforced one another in a virtuous circle. Theresa’s Mays speech and Brexit plan threaten to create a vicious circle whereby reduced trade, investment and labour flows will combine to undermine the dynamism of the UK economy hitting jobs, economic growth, raising inflation, damaging business and consumer confidence and lowering the living standards of tens of millions of UK citizens. Let me make this clear - consensus forecasts for the UK economy of around 1.5% this year are wide of the mark, there will be negative economic growth and things will get worse not better watch the plummeting investment figures and consumers reign back as the reality dawns on them that things are going to get very bad. There is just one word that summarizes all this AWFUL !
There was one bit of good news in her speech the final deal will be put to both the House of Commons and the House of Lords for final ratification. I hope that Parliament uses the chance to reject her deal, if it is a bad as I suspect it will be and it is put back to the UK for a second referendum to either ratify the final deal or to remain an EU member. This extreme view of Brexit was not what was sold to the British people in the referendum debate.