Sir Desmond Swayne TD

Sir Desmond Swayne TD

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Brexit Shock?

27/03/2017 By Desmond Swayne

One of the greatest falsehoods presented to us during the referendum campaign last summer, was the International Monetary Fund’s pronouncement (no doubt prompted at our own government’s suggestion) that an exit by UK from EU presented the principal threat to the health of the world economy.

That is not to say however, that there aren’t very substantial threats to both the world economy and to our own: There are; but they have little to do with our decision to leave the EU, even if they are presented as such.

Consumer confidence has taken a big hit with rising inflation – at 2.3% in February. Given that consumer spending drives almost two thirds of our economic activity, denting that confidence can have a severe impact. It is most certainly responsible for the very thin time that our high streets have been experiencing recently, with retail sales actually falling. The same depressing trend is evident in figures for recent mortgage approvals. These figures will be seized upon as vindication by those who predicted the Brexit ‘economic shock’.

Consumers are taking a hit because prices are rising; and prices are rising because of the devaluation of the pound which will, of course, be presented as a consequence of Brexit. It isn’t. Rather it is a consequence of the huge and growing trade deficit that we have been running over recent years – at almost 10% of our national product. What is more, we desperately needed this devaluation to correct the imbalance in our economy. It will move us back towards a trade equilibrium by making our exports more competitive whilst choking off some of our seemingly insatiable demand for imports.
Whilst the higher prices hurt consumers in the short term, they are nevertheless a necessary correction for the long term health of our economy.

The world economy is in desperate need of the flexibility we have recently achieved, because currency exchange rates have become increasingly sticky – almost fixed. There are countries – not least in parts of Europe – desperate for a devaluation similar to one that we have seen, in order to rescue themselves from becoming more and more uncompetitive. If Brexit could be blamed for Sterling’s devaluation, it would be a boon to the world economy and not a threat.

We will become accustomed to every economic development being presented in the worst possible light – and blamed on Brexit.

Filed Under: DS Blog

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