By Conor Lambe, Economist at Danske Bank
The UK economy is feeling the effects of last year’s Brexit vote. In the second quarter of this year, household spending grew by just 0.1 per cent as consumers’ purchasing power came under pressure from the high inflation brought about by the depreciation of the pound following the EU referendum. Business investment was largely unchanged compared with the first three months of the year as uncertainty about future access to EU markets held companies back from sanctioning large investment projects. Overall, the economy grew by a relatively low 0.3 per cent.
But how does this growth compare to that of the other G7 advanced economies? Unfortunately, not very well. Based on the latest available real GDP growth data, the UK actually sits at the bottom of the league table.
In the second quarter of the year, Canada’s economy grew by 1.1 per cent relative to the first quarter. The largest contributions to GDP growth came from exports and consumer spending.
In Japan, the data exceeded expectations as real GDP grew by 1 per cent compared with the first three months of the year. This was the sixth consecutive quarter of economic growth and marked the first time Japan had achieved a run of six quarters of growth in a row since the second quarter of 2006.
Economic growth in the US picked up from 0.3 per cent in the first three months of the year to 0.8 per cent in the second quarter. Growth was driven largely by consumer spending and non-residential fixed investment.
And in Europe, the German economy grew by 0.6 per cent, French GDP grew by 0.5 per cent and Italy experienced economic growth of 0.4 per cent in the second quarter of 2017.
Given the impact that Brexit is already having on the UK economy, it goes without saying that reaching an agreement with the EU on the terms of the UK’s exit as quickly and smoothly as possible is of paramount importance.
However, it seems as if only limited progress was made during last week’s Brexit negotiations in Brussels. Michel Barnier, the EU’s lead negotiator, commented that no “decisive” progress was made during the talks.
Despite this, there was some encouraging news for people in Northern Ireland as progress was apparently made with regards to the Common Travel Area between the UK and Ireland and identifying work to be done on North-South cooperation as included in the Good Friday Agreement.
If the talks are to move from separation issues to the UK and EU’s future relationship in October, as the UK hopes they will, then “sufficient progress” needs to be made on the UK’s financial obligations to the EU, citizens’ rights and the Northern Ireland border.
The amount of money that the UK will pay the EU upon leaving is the most contentious of these three issues. One of the reasons put forward by the Leave campaign for withdrawing from the EU during the referendum campaign was the amount that the UK pays into the EU Budget. Therefore the UK Government is understandably reluctant to sanction a large payment to the EU in order to leave it. Obviously, detailed negotiations need to take place and a solution needs to be found that is acceptable to both parties. But if the cost of moving onto the next phase of talks in a timely manner and in a spirit of cooperation, and therefore eventually agreeing a good trade deal with the EU, is paying a bit more than the UK might ideally like, then this is probably a price worth paying.
It is fair to say that the short-term impact on the economy of the UK’s vote to leave the EU has perhaps not been as large as had been expected in some quarters prior to the referendum. But, looking at the latest GDP growth numbers, it is clear that Brexit is having an effect on the UK’s economic performance.
This article was published in the News Letter on 5th September 2017.