Brexit does push Britons to the brink

A different look at why Britain's GDP grew after Brexit really puts the country on the brink of collapse. Business Insider puts in this analysis the arguments for this in a row.

UK GDP (gross domestic product) growth figures suggest the economy received a boost after Britain voted in favor of Brexit in June last year. But that growth arose because the British borrowed more money. Wages did not increase. A post-Brexit crash is therefore a real option.

Last week, the inflated economic growth figures from the fourth quarter of 2016 were met with much fanfare by Brexiteers in the United Kingdom. Strong economic growth of 0,7 percent for the quarter showed that fears of an acute collapse after the referendum had been greatly exaggerated. In 2016, weak polls among purchasing managers misled economists. The doomsday scenarios they predicted for the second half of 2016 did not materialize. Since then, the Brexiteers have been crowing and praising the robustness of their national economy.

But the Brexit ravine has not disappeared. In reality, the British are standing on the edge of it, peering into the depths. Analyst Samuel Tombs of Pantheon economics wrote it in a recent analysis: "The imbalanced composition of economic growth shows that problems are on the way."

The problem is that the recent growth in national income seems to stem from consumer spending on borrowed money. Wage growth slowed sharply in the last quarter of 2016, but consumers continued to spend and draw on savings. This is anything but tenable, analyst Tombs thinks. His thesis is that British consumers have accelerated large purchases for fear that prices will rise sharply in 2017. Inflation expectations rose sharply in the last quarter of 2016. Consumer spending is expected to grow only very modestly in 2017.

The analyst expects UK economic growth to slow to its lowest level since 2009. The culprit is inflation: the British pound slumped after the June 2016 Brexit referendum, as investors withdrew en masse from a country that was knowingly detaches from the third largest free market economy on the planet.

Initially, the decline in the British pound was good news for the British economy: exports were suddenly cheaper and the economy benefited. However, the long-term outlook is significantly less rosy. Suddenly British consumers discover that they can buy less for a pound and that their purchasing power has declined. And that they have become poorer. The chart from IHS Markit speaks volumes:

Basically, several eerie things happened recently. Wages stopped rising, consumers continued to spend and went further into debt. They did this because they suspected – quite correctly – that everything would become more expensive in the future. A bad omen for economic growth in 2017.

Translate this to the real economy and you will see that economic growth is taking a hit. In other words, the sudden nosedive in the economy that economists predicted after the referendum is just around the corner. He only comes with a little delay.

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