Brexit: from Breuforie to Brecessie in 7 years

This summer marks the seven-year anniversary of the Brexit referendum. However, leaving the European Union has not brought the United Kingdom the hoped-for economic prosperity. The tight labor market means that inflation is more difficult to control than on the mainland.

On Wednesday 1 February it will be three years since the United Kingdom left the European Union. Few champagne bottles will pop to celebrate. First of all, there are still quite a few loose ends to be tied up. For example, the British cabinet's plan to end the year by the end of approximately 4.000 European rules that have not been actively incorporated into national legislation can count on quite a bit of criticism. For example, the opposition Labor party has already forced a vote in the House of Commons to prevent workers from losing their generous rights to extra holidays and maternity leave, among other things.

Taoiseach: mistakes made
The most glaring loose end is, of course, the issue of the border between Ireland and Northern Ireland. The Irish Prime Minister – or better: Taoiseach – Leo Varadkar emphasized at the beginning of this year that quite a few mistakes were made in the agreement. Negotiations are progressing very slowly at the moment. And even if all political and legal matters are handled smoothly, 2023 will be a rocky year for the UK economy. The Bank of England (BoE) expects a deep recession to last into next year, while investment bank Goldman Sachs predicts that the economy will shrink almost as fast as Russia's in 2023.

Inflation makes the difference
As in the rest of the developed world, the pain for the UK is in high inflation. The big difference with the rest of Europe and the United States is that it takes a lot more effort to get that inflation under control. In December, UK inflation fell only minimally to 9,2%, from 9,3% in November. This decline is much slower than in other regions. One reason is that inflation is fueled by higher wages, due to a tight labor market. In the aftermath of Brexit, many immigration workers have left the country, so that according to estimates by various think tanks, there is now a shortage of 330.000 workers in mainly manufacturing and logistics sectors.

A lot of pain in 2024
The high inflation forces the BoE to push the interest rate pedal even deeper. At the end of 2021, the central bank was well ahead of the Federal Reserve and the European Central Bank with the first rate hike. In 2022, the policy rate was subsequently raised no less than seven times. If the tightness in the labor market translates into higher prices via rising wages, a lot of interest rate moves will still be needed to put the brakes on wage growth and curb inflation. It looks like the BoE is preparing for a further rise in interest rates on February 2 – just after the Brexit anniversary. The prospect of a higher interest rate has been a boost to the pound in the currency world in recent days. Due to the economic problems, however, the prospects for the rest of the year are less attractive.

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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