Pondrally can't hide Brexit pain

The pound has appreciated by almost 10% against the euro within a year and a half. This advance is not an indication that the British economy is recovering well from the double blow of corona and Brexit. The departure from the EU is also making itself felt on the mainland.

In foreign exchange markets, Russian troop movements on the border with Ukraine cannot divert attention from what is happening on the interest rate front. In exactly one month, the Bank of England (BoE) board will meet to announce another rate hike. It must be very strange if they do see that.

At the previous meeting on February 3, half of the board members already voted to raise interest rates by half instead of a quarter. And since then, inflation expectations in the country have risen considerably. The BoE is now projecting inflation to peak at 7,25% in April.

Raise? Preferably not too much!
For BoE chairman Andrew Bailey, the sharp rise in inflation was already a reason to call on employees to please not ask for too much salary increase. That appeal brought him a predictable load of criticism. It also indicates his concern that the temporary upturn in inflation will become more structural as a result of a wage-price spiral. For the time being, the rise in inflation is mainly the result of temporary deficits.

This drives up the price of all kinds of things: from natural gas and parts to truck drivers and even CO2 for the brewing and food industry. Some of those deficits are a direct result of Brexit. Many foreign workers have returned to their home countries in view of stricter labor regulations. And although it has been agreed that tariffs and quotas can be traded with the EU, new border controls sometimes make this a challenging and time-consuming process.

Trade flow becomes a one-way street
After a messy start in the weeks following the introduction of new Brexit rules in early 2021, it is becoming clear that trade is becoming increasingly one-sided. In the first ten months, EU exports to Great Britain grew by 3,3% to EUR 232,2 billion. On the other hand, the value of the flow of goods to the European mainland fell by 14,5% to €116,9 billion. The country has not been able to compensate for this decrease with higher exports to other countries.

After more than a year of trading, a new trade agreement has hardly come any closer. The main boost for Prime Minister Boris Johnson are new agreements with Australia and New Zealand. However, trade with the latter country is less than 0,2% of British GDP. Yet it is too easy to dismiss the country as the only big loser from Brexit.

In one fell swoop, the EU has lost almost a sixth of its economic power and at least as much of its political and military clout. And in the long run that will be felt much more firmly than the temporary advantage of a relatively weak euro for the European export sector.   

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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