Intermediate macroeconomic theory explains the interaction of different economic agents with one another and its impact over the performance of an economy as a whole. The individual behaviour of economic agents is examined to understand the economic performance systematically (Besanko and Braeutigam, 2010). In this report, the economic consequences of BREXIT in relation to the United Kingdom (UK) are studied by examining the different major economic agents. BREXIT is a terms used to indicate the withdrawal of UK from the European Union (EU). UK has decided to leave the membership of EU and it has major consequences for the economy of this country.
This report includes discussion over the impact of BREXIT on the different economic aspects such as living standards, trade patterns, UK’s obligations towards EU, labour market, exchange rate of British pound and the overall growth of the economy. Through this, the opinion of Nobel prize-winning economist Paul Krugman will be analyzed in this report.
In this section, the possible influence of BREXIT on the economic factors such as living standard, trade patterns, labour market, exchange rate and overall growth prospects of UK economy is explained and discussed.
According to Carbaugh (2011), living standard of people in a country is greatly shaped and influenced by the different economic factors and income level is one of them. People with low income are less able to access basic facilities for living such as quality education, healthcare and leisure, which influences standards of living. Employment level in a country greatly influences income and spending or consumption power of people in a nation. The GDP of the county determines the employment level, which is based on the demand conditions. Mankiw (2016) stated that low GDP in an economy is caused by low investment and it consequently causes low demand, employment and GDP levels in short run.
The decision of living EU has caused economic certainty, which damaged the confidence of consumers at the greater extent. It is likely to cause decline of investment by households and firms. This would cause decrease in the level of output or GDP. Due to this, the demand of labour will diminish, which will have negative impact on the employment and consequently income level of the people. Due to low income, people will demand less, which will further depress the GDP level (Chu, 2016). It is likely to affect the ability of people to access basic facilities and consequently living of standards.
Low income due to low employment will reduce the tax revenues. This would affect ability of UK government to spend on the social infrastructure development and it could also depress the living standards in UK (Rodionova, 2016). Apart from domestic demand, decline in demand from EU countries will also have negative impact on the GDP, employment level and living standards of people. In UK, 12% demand of goods and services were constituted by EU countries, which contribute in developing around 3.3 million employment opportunities. BREXIT plays significant role in declining jobs and consequently living standards of people. But at the same time, number of jobs can increase in import competing industries due to increase in import cost and less regulations. It will cause positive impact on the job level (Begg and Mushövel, 2016).
The trade patterns of a country majorly depend on the trade related rules and regulations. This shapes a country’s trade relations with the other. The government plays critical role in determining the trading rules and consequently shaping patterns. Due to EU membership, UK based firms were able to sell their goods or services anywhere without paying any taxes. The membership also offered benefits to the UK companies and customers as they imported from anywhere in EU without paying tariffs. BREXIT is likely to affect the trade patterns of UK (Foster, 2017). In below graph, top ten trading partners of UK are indicated:
(Foster, 2017)
The above graph indicates the trading partners of UK mainly include EU countries. Due to BREXIT, UK is not likely to access the European market freely. The companies and consumers of UK may need to pay certain trade tariffs and duties. This could increase cost for UK to import and export in the European market. It may influence the trade patterns in the significant manner. This could encourage firms to establish trade relations with the other countries of the world (Reenen, 2017). The firms may seek to develop trade relations with the countries with having ability to provide low cost goods and services like China.
The cost of establishing trade relations with the other countries of the world could be costly despite of reduction in tariffs. Non-tariff barriers such as regulations, ant-dumping actions, border duties and others could make the costly for UK to trade outside the EU. This may cause decline in half trade. Although, BREXIT could allow UK to make more liberal trade with the other countries outside the EU but it is expected to offset the losses at the very low level (CentrePiece, 2016).
Similarly, UK will need to develop trade relations or deals with the all WTO members for replacing EU membership. But, Germany and other EU countries enjoy trade surplus due to the trade relations with the UK. In this case, it is also expected that BREXIT is likely to give power to UK for making preferential deals with the other countries (Giles, 2016).
The EU membership enforces different rules and regulations on the member countries, which contributes in affecting the businesses in both positive and negative manner. There are around 100 heavy regulations, which are imposed by EU, created cost of around £33.3 billion for UK. But at the same time, the same regulations bought annual benefits of around £58.6 billion (CentrePiece, 2016). But, the decision to leave EU membership is likely to affect the obligation of UK for the other EU countries.
The major trading partners of UK mainly include EU countries. The more trade obligations affect the relationships with the countries, which causes reduction in the trade volume, overall GDP and the economy as a whole. Due to this, it is expected UK is likely to reduce its obligations while trading with EU members due to its economic dependency over the trading activities. The reduction in trade will harm the national economy and most likely to create risk of major recession (Mankiw, 2016). Although, new trade deals can be a way to offset the loss but new trade agreements with the countries outside the EU will take long time to offer trade benefits. The time of realizing benefits from the new trade deal is too long, which may affect the economy. Thus, it is expected that low obligations may be imposed by UK towards EU.
On the other side, more obligations can be imposed by UK due to the dependency of EU members over this country for export and import activities. The EU members have been enjoyed several trade benefits and boosted economy due to the UK membership. For gaining more benefits, BREXIT can be used an opportunity to raise income by reducing and increasing tariffs on import and export with the application of new trade obligations. UK is major trading partner of several EU countries and their performance of economy may become highly vulnerable if they leave the trade relationship in any case. It may force countries to accept the legal obligations of UK, which may create benefit for this country at the greater extent (Foster, 2017). In this way, the obligations from UK over the EU countries may increase or decrease on the basis of perspective considered for economic future.
The decision to leave EU through BREXIT is expected to affect the labour market of the UK at the considerable level. The EU membership facilitated free movement of labour between the member countries, which offered several benefits to the firms in term of making the labour market highly wide and competitive. At the initial level, the jobs opptunities has reduced significantly as online job ads decreased from 1.5 million to 800,000 after the BREXIT (Chu, 2017). The decline in jobs is likely to make the labour market more competitive in UK.
On the other side, BREXIT will influence the rules and regulations in relation to the migrant labour. The number of EU migrant labour is expected to decline, which may cause shortage of diverse workforce in the market. BREXIT caused uncertaininty and reduced interest of EU citizens to work in UK. The lack of clarity in the rules related to future immigration encouraged people of EU to avoid jobs in UK. It is likely to cause shortage of workforce (CentrePiece, 2016). In this situation, UK-born people could have more opportunities to work and to get attractive wages from the businesses.
Due to BREXIT, the shortage of wide and diverse range of skill set in the labour market of UK may also cause. It is likely to increase the competition among firms to get skilled workforce. But, this may also have positive impact on the ability of UK-born people. Due to EU membership, the movement of labour from EU nations to UK was quite obvious due to which it caused difficulties for people of UK to get jobs. EU immigration caused increase in the supply of labour, which made the unemployment rate quite high (Chu, 2017). BREXIT may cause decline in the movement of labour and it is likely to reduce availability of workforce in the UK market.
At the same time, most of the EU workers work in the industries such as manufacturing, administrative and others, in which employers more often face difficulties in getting skilled worker. The reduction in the number of EU immigrate labour is likely to create problem for such employers to get the required workforce (Wilson, 2017). Thus, BREXIT may squeeze UK labour market by causing shortage of skilled labour.
BREXIT have made considerable impact on the exchange rate of pound. In accordance to Montiel (2011), there are different factors including supply and demand of currency, interest rate, inflation rate, balance of payments and economic growth influences the exchange rate. UK’s decision of leaving EU has caused considerable impact over the above factors, which has influenced the exchange rate of pound. BREXIT have influenced the demand of pound at the significant manner. Below chart depicts the pound fell significantly after the BREXIT:
(Source: Bowler, 2017)
The above chart depicts that value of pound against the dollar has plumped considerably after the BREXIT.
The rate of inflation in UK has risen significantly after the BREXIT, which affected the demand and supply of pound. Due to decline in import by 12%, the trade deficit has increased. The other reason of increasing inflation was higher oil prices. The trade deficit in UK reduced the demand of pound than the supply, which caused fall in the exchange rate. The volume of import is likely to decline more significantly due to the fall in trade with the EU nations. Germany imported more than 50% of goods or services from UK (Elliott, 2017). The import is expected to decrease after BREXIT and this may cause more fall in the demand of pound. The surplus of pound in the market could cause decline in its value.
It is expected the uncertainty will be sustained in the economic activities of UK. This may cause volatility in the value of pound. Trade and investment balances are more likely to be reduced due to the further decline in the value of pound. The current account deficit of UK is also growing significantly, which also indicates expected decline in the demand and value of British pound against the dollar. This may cause significant depreciation in the value of UK currency (Cassell, 2016). But at the same time, it is expected that new trade deals are expected to influence the value of pound in the positive manner as due to this, import with the major economies of the world could established or increased. This could cause rise in the demand and value of British pound in the significant manner.
The growth of UK economy majorly depends on the influence of BREXIT on the economic agents. The real GDP of the country after the BREXIT has shown little increment by 0.3% in compare to the G7 countries. Due to this, it is expected that GDP of the country will improve in long-run. Similarly, the level of household saving has reduced significantly as people saves less and borrows more (Giles, 2017). The spending is maintained by consumer with a significant reduction in the savings. Low saving makes negative impact on the funds for investment and growth. Due to this, the reduction in saving is likely to make negative impact on the growth of UK economy (Sexton, 2015).
The rate of inflation has increased, while the growth in wage rate is remained low in the UK. It has adverse impact on the living standard of people. Due to inflation, people need to pay more for making purchase of required quantities. The decline in wage rates has also affected spending power and living standard of people (Giles, 2017). Low living standard indicates that people in UK may not able to access the basic facilities such as education and healthcare, which could have adverse impact on the overall output of the economy (Mankiw, 2014).
BREXIT caused the conditions of job uncertainties for people from EU countries, who are working in UK. This uncertaininty has lowered the unemployment rates in this country. It is expected that BREXIT is likely to develop job-opptunities, which may influence the economic growth positively (Giles, 2017). The value of pound against the dollar has declined which may cause lower imports and higher exports. High export is likely to cause creation of new jobs in the economy, which facilitates significant growth (Mankiw, 2016).
Conclusion:
It can be concluded on the basis of above discussion that the economic consequences of BREXIT on the economic performance is quite uncertain. In short run, it has made negative impact on the economic agents of the country as GDP, employment level, spending power and consequently living standard of people has declined considerably. Due to BREXIT, it is expected that UK is likely to develop trade relations with the countries outside the EU but it may increase cost of trading due to non-tariff barriers. The obligations of UK on EU members will also vary based on the decisions of authorities. BREXIT also causes reduction in EU immigrant workers and it caused shortage of skilled workers. The value of pound has also declined against the dollar after the BREXIT. Overall, the BREXIT is likely to influence the UK economy negatively. But, it is expected that new trade deals will cause benefits for the economy in long run.
References:
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Carbaugh, R.J. (2013). Contemporary economics: an applications approach. ME Sharpe.
Cassell, H. (2016). The Brexit pound crash explained. Retrieved from: https://www.gq-magazine.co.uk/article/pound-crash
CentrePiece (2016). Brexit and the UK labour market. Retrieved from: https://cep.lse.ac.uk/pubs/download/cp478.pdf
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Chu, B. (2017). Brexit latest: Slowing immigration from European Union already hurting labour market say recruiters. Retrieved from: https://www.independent.co.uk/news/business/news/brexit-immigration-european-union-labour-market-recruiters-a7724061.html
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