- May 17, 2017
- Posted by: admin
- Category: Economy & Markets
The turmoil in politics in United Kingdom has taken another U-turn on the 18th of April, 2017 by the announcement of snap elections on 8th June, 2017. The report talks about the aftermath of the historic EU referendum (23rd of June, 2016) on Britain’s economy and the European Union. It will be a year in June this year. Also, the elections are creating more dubious moments for the world. The report also talks about the effect of elections on Brexit negotiations.
What, why and when of Brexit?
Brexit is an amalgamation of two words: “Britain” and “exit”. It refers to the departure of Britain’s from the 28 nation European Union. The bloc (EU) had been powerful to hinder the British sovereignty and national interests like trade, immigration and labor. The then Prime Minister David Cameron had promised to hold a referendum. He could have stopped it but worked in the interest of the public. The UK citizens (suffering from paucity of opportunities) grabbed this chance and the exit (leave) vote was passed on the 23rd of June, 2016 in the EU referendum. Theresa May has been leading UK since Cameron resigned after referendum. Article 50 was triggered last month on 29th March, 2017 and hence the beginning of formal negotiations.
PARAMETERS FOR UNDERSTANDING THE HEALTH OF BRITAIN’S ECONOMY:
Gross Domestic Product:
Long term (fig 1): The effect of referendum is not much on GDP. GDP was falling since 2011.
Short term (fig 2): Year-on-year growth in quarter 3 is more in 2016 (referendum was passed in June, 2016) as compared to 2015. Quarter-on-quarter growth in quarter 4 is more than the growth in quarter 3 (positive effect).
Comparing GDP of EU quarter wise: No impact on GDP in the third quarter. 4th quarter GDP rose of EU.
According to ONS report, UK experienced strongest rate of growth among European groupings and G7 countries during Quarter 4, 2016. According to CBI Industrial Trends Survey, strong domestic and export performance was shown by demand in UK manufactured goods. Domestic orders rose by 20% and increases in volumes of output.
Unemployment and Job Scenario
In third quarter 2016, UK nationals working in the UK increased by 213,000. The number of vacancies increased by 2.1% to 767,000 between the last quarter of 2016 and first quarter 2017 (highest level).
The number of vacancies increased by 2.1% to 767,000 between the last quarter of 2016 and the first quarter of 2017 (highest level).
According to the latest ONS report, employment rate was 74.6% (highest since 1971). Unemployment rate has been down. It has not been lower since 1975.
Currency and Monetary policy
It was expected that Brexit vote would lead to an increase in the premium for lending to UK businesses and households and this did not happen. The bank of England announced an interest rate cut to 0.25% from 0.5% to prevent post-Brexit recession. It expanded Quantitative Easing (QE) in August 2016. Next monetary policy to be announced on 11th May, 2017.
The GBP-INR exchange rate is 20% down as compared to pre referendum levels. 80 seems to be the support zone but if the pound weakens then it might fall to 76 level. Britain’s vote in a referendum on June 23 to quit the EU had punished financial markets, businesses and the pound.
The sterling rose to a new high on the day snap elections were announced by Prime Minister Theresa May. Pound rose 400 pips between European and NY trading sessions. The expectation of political leadership stability after the announcement of elections in June strengthened the Pound.
The stock prices fell sharply after the referendum in Germany, France, Spain and Italy. It recovered later (in 3 weeks). The index FTSE 100 fell by more than 3% on 24th June, 2016.
Inference: GDP, unemployment and currency show positive signs after referendum. Most of the economy indicators have shown some growth especially employment has increased (74.6%). This data is going in tandem with the expectations of UK citizens. Brexit seems inevitable. The politics (upcoming elections) can also effect Brexit in the following way.
POLITICAL SCENARIO SNAPSHOT
The different political parties represented in the House of Commons are:
|Conservative Party||Theresa May|
|Labour party||Jeremy Corbyn|
|Liberal Democrats||Tim Farron|
|Scottish National Party||Nicola Sturgeon|
Source: BBC News
TURNING POINT: THERESA MAY ANNOUNCED SNAP ELECTIONS ON 18TH APRIL, 2017:
“The country is coming together but Westminster is not. Hence it is in the national interest to have general elections on 8th June to let the people decide.”- quoted May. Theresa May wants power to be able to start negotiations with EU (to execute ‘Hard Brexit’). She was not getting majority votes in the parliament. Hence she is confident in getting majority in the parliament through snap elections.
PROMISES BY THE PARTIES (For 8th June Election Campaign):
Conservatives/ Tories: The Tories will deliver hard Brexit: control over the immigration system, leaving access to single market and withdrawing from jurisdiction of the European court of justice.
Labour Party: Guaranteeing rights of the EU nationals and access to single market will be the priorities. It will try to rebuild the economy, living standards and services like education and NHS. It will execute soft Brexit if it wins the elections.
UKIP – It is committed to a clean, quick and efficient Brexit. The party wants to end open door immigration policy. It also has agendas like education and health services.
Liberal Democrats: It is the only party to have explicitly declared- ‘No Brexit’.
IMPORTANT ASPECTS OF ELECTIONS
The primary aspects of these elections are: NHS, Brexit, Economy and Immigration. Though the aspects are interrelated, each component has significance among different categories of UK citizens.
Immigration crisis: It was the trigger point for Brexit. It affected the internal life of the country and became the ground level reality of the decision. 3 million immigrants were blamed for taking jobs from British people, overcrowded schools, stretched-to-breaking point NHS, expensive rent and lack of integration. Lower income groups who do not have many job opportunities.
NATIONAL HEALTH SERVICE:
Barring Brexit, NHS (National Health Service) crisis has become an important parameter in these elections. NHS is the public health services of England, Scotland and Wales. The issue has got maximum importance in terms of percentage (70%) according to the BBC survey. The parties are using this weapon to attract more voters. The Labour Party has put NHS at the center of its campaign. It depends on the voters and the trust factor which will decide the majority. Even Tories are concentrating on NHS now. Though the health conditions deteriorated (financial pressures) under the Tories, but they are confident of the votes.
According to Telegraph Polls, voters are turning away from Labour to Tories on 5 topics: immigration, defense, economy, Brexit and NHS. The other parties do not have majority according to polls except Conservatives and Labour party. Most of the MPs of the Labour Party fear the collapse of Labour Party and hence not defending their current seats. The second most majority (Labour) seems weaker this time under the leadership of Corbyn.
EFFECTS OF BREXIT ON BRITAIN
- EEA: Like Norway, Britain will not have to pay trade tariffs in free trade agreement with EU.
- Free from contribution to common budget: Net contribution is about £8.5 billion each year.
- Lesser regulations: It will not have to comply with most of the EU regulations. It can spend all of its money on its own growth of economy.
- Employment: The job opportunities will rise for the people born in Britain. The number of immigrants will be controlled under hard Brexit conditions.
- Fisheries: UK became net importer in 1984 after Common Fisheries Policy (CFP) was introduced. Most fishermen and coastal communities voted for Brexit. It can enjoy 200 nautical miles fishing border like Iceland if outside the CFP.
- Skilled workers shortage: There are large number of EU workers in Britain’s health services. 4.5% of the total workforce gives an important skillset. EU membership also means that Britain gets rights to receive free health care in other member states. 
- Agriculture: Brexit will mean a departure from the Common Agricultural Policy (CAP) and its subsidy and regulatory regime.
- FDI: The long term effect on FDI is uncertain and depends on terms of negotiation with EU.
- Trade: In WTO agreements, MFN (most favored nation) tariffs will be imposed in UK-EU trade.
- Effect on average UK incomes : After Brexit, the incomes will fall.
|Fall in income||Optimistic view||Pessimistic view|
|£ per household||850||1,700|
IMPACT OF BREXIT ON EUROPEAN UNION
- EU wants that UK be kept under European court to meet budget commitments (in billions) and protect rights of the European nationals.
- Britain can stop spending £350 million which is equivalent to half of the budget of schools in England.
- If Britain would cap immigration, then it would have negative impact on eastern European countries (1.2 million workers in Britain in 2015).
- If Brexit happens, then Germany (EU’s largest member) would have to provide the extra cash. Germany’s Ifo institute estimates that would be 2.5 billion euros.
The possible outcomes for EU and UK after Brexit
|3 POSSIBLE OUTCOMES||SCENARIO 1: EU is weakened||SCENARIO 2: EU gets through||SCENARIO 3: EU more united|
|Unity of the EU||UK leads the way in EU fragmentation.||EU remains predominant organization.||EU dominant organization in Europe even if one member is missing.|
|Balance of Power||Adds to confused leadership with no clear leader;
Eurozone under pressure.
|German power enhanced, tensions with France remain, but EU remains rudderless.||Clearer leadership for EU institutions, complimented by Germany.|
|Political economy||Protectionist or divided.||Retains strong outward looking agenda||Global economic power pushing its own model.|
|Relations with UK||Difficult, UK trying to redraw Europe’s political relationships||UK a close partner, engaged with EU.||UK treated as close but junior partner.|
IMPACT ON INDIA
- Brexit may create recession risks that could dent IT demand. 5 large Indian IT companies have 8-15% revenue exposure to the British Pound and most of it is unhedged- Bharti Airtel,HCL Technologies, Emcure Pharma, Apollo Tyres and Wockhardt. Volatility in currency can create translation losses for Indian companies.
- UK is 18th on list in India’s trading partner lists (2014-15). Britain (in G20) is also the largest investor in India in past 10 years. India’s exports to the UK are around 3% of our total exports and exports to the European Union are around 17% of total exports. A free trade agreement is being talked between Britain and India. A 240 million pound fund known as Green Growth Equity Fund (to finance clean energy) is also a part of the trade agreement.
- India is the largest source country of doctors in the NHS after Britain. Hence more demand for Indian doctors after EU-trained doctors leave.
- UK’s currency is expected to be weaker. It would be cheaper for Indian firms to import from their subsidiaries in the UK.
Theresa May’s popularity is at 62% at present with her party being at the top in the opinion polls (50%). Her chances of winning are the highest as of now. Some highlights under her time frame:
- The GDP and employment figures have been positive after the Brexit referendum.
- The firm’s competitiveness grew by 12% in the past three months according to Confederation of Britain Industry.
- Public sector net borrowing decreased by £20.0 billion in the financial year ending March 2017 compared with 2016. This is the lowest net borrowing March 2008. (ONS release)
- Exports have increased and the output volume has also increased.
Source: Telegraph and Mirror UK newspapers (rough estimates)
Conservatives are crushing their way forward and winning people around. Their majority seems unbeatable.
Most marginal seats in UK: 2015 results
|City of Chester||Lab||Con|
|Ealing Central & Acton||Lab||Con|
|Berwickshire, Roxburgh & Selkirk||SNP||Con|
|Ynys Mon (Anglesey)||Lab||PC|
|Vale Of Clwyd||Con||Lab|
|Brentford & Isleworth||Lab||Con|
The table shows that 5 out of 10 constituencies are already a comfort zone for the Conservatives and in the second place as well, it has 4 constituencies in the pocket.
The Labour Party is already losing its sheen because of its leader (seen from opinion polls graph above).
Even after the release of the Liberal Democrats’ clear motives of no Brexit, the public has indicated that it is inclined towards Brexit. May will get strong negotiating power with the European Union if she sweeps the maximum votes. If she fails, then Labour Party or Liberal Democrats can take over according to polls. Chances of alliances are blurred as quoted by MPs. But situation can turn.
|3 OUTCOMES AFTER ELECTIONS (8TH JUNE):|
|Brexit has more probability to be implemented because the maximum contesting parties are pledging for BREXIT. Two possibilities:|
Conservatives (Theresa May) will execute hard Brexit if it wins: control over the immigration system, leaving access to single market and withdrawing from jurisdiction of the European court of justice.
Labour is going for soft Brexit. UK remains in the single market and customs union in this case.
If by any miracle Liberal Democrats (opinion polls at 11%) win the elections, Brexit could be stopped if Britain will be able to revoke article 50 before it expires (if the rest of the EU agrees). The possibility of this happening is very low.
One important thing is that the political outcomes like the Trump victory and the Brexit referendum indicates that the polls cannot be trusted 100%. The voters were termed ‘shy Tories’ in the previous exit poll elections because they did not reveal their voted parties. The statistics and data can only help us give the possible outcomes but reality is uncertain. The uncertainty in EU will still be prevalent after Britain elections due to elections in France, Germany and Italy till the next year.
With the chances of Theresa May winning the elections, ‘Hard Brexit’ has a very high probability of being executed after elections. She will get strong negotiating power with EU. This gives UK scope for making good relations with other nations except EU27. UK (of the G20 countries) is already the largest investor in India and hence India has a great chance to boost trade ties with Britain. UK will be free to discuss bilateral trade pacts with India (positive impact on exports and eventually positive growth for Indian economy!).