Brexit, the process of disconnecting the United Kingdom from the European Union, has been launched. The first thing we must be is intellectually honest and recognize that the estimates of an economic debacle post-referendum have not happened, but the challenges are relevant. Most economic indicators in the EU and UK have been strengthening. Growth and employment generation in the UK have been revised upward by the Bank of England, and investment banks estimate a similar improvement in Europe.
The UK economy continues to grow with a 20bps increase over post-referendum estimates, bringing GDP growth for 2017 to 1.6%. In addition to the recent revaluation of the Pound against the Euro, we have seen a similar improvement in estimates for the European Union, where GDP growth expectations have been revised up to 1.6% for 2017 and 1.8% for 2018. The reality is that all this happens because there was already a very independent framework in the UK and a dynamic economic environment that makes risk much lower, but we cannot forget that there is a risk.
The fact that these concerns and doom expectations have not yet manifested does not mean that risks do not exist, especially in the face of a tense, long, and hard negotiation in which both sides have very different positions. If the European Union is smart, it would use Brexit as an opportunity to strengthen as an area of freedom, flexibility, attractive investment opportunities and global trade.
Exports and imports The 0.4% decreased in UK production experienced in the first months of 2017, was due to a decrease in the pharmaceutical sector of 0.9% mostly caused by the uncertainty about the Trump healthcare plan, not by Brexit.
The UK trade deficit fell to 4.7 billion pounds in the three months leading to January 2017. Exports grew at the fastest pace in ten years in the quarter, reaching a record high, and imports also skyrocketed. Therefore, it is safe to say that the impact on trade that many predicted is nowhere to be seen at the moment. The UK is one of the biggest trading partners of the EU, and it will continue to be.
The United Kingdom is the second largest net contributor, after Germany, to the EU budget. That cost will have to be distributed among the other member States. Spain for example, will have to pay around 1 billion Euros more per year.
An extremely important topic. Net immigration from Europe to the UK has more than doubled since 2012 -according to a report by Capital Economics-, reaching 185,000 people. Total net immigration has also shot up, reaching more than 320,000 people, compared with a historical average of 150,000 people, according to the British government.
The free movement of citizens and the rights of EU workers in the United Kingdom and those of the British in the rest of Europe will likely be the ace card used to accelerate negotiations. The UK does not want to outsource its immigration policy to the European Union, as it does not have a clear one or exercise leadership in the face of geopolitical challenges. Be that as it may, the days of the free movement of workers are over, and a policy similar to that of the United States could be expected.
Nearly half of UK exports go to the EU, but of the 28 countries, 26 have huge trade surpluses with the United Kingdom. What does that mean? The EU, country by country, exports more to Britain than it imports. That is important, especially with the country that has the largest surplus with the UK, Germany.
The UK has a high deficit in trade in goods, but a huge surplus in services. All this means that the exit from the single market can have an impact, but that the solution for each other depends on a fast and specific agreement for the United Kingdom.
With the latest data available, the UK exports 19.4 billion pounds per year in financial services to the EU, a surplus close to 0.9% of GDP. This is a big stumbling block. It is not clear if financial institutions will have a passport to operate with the EU or if the financial sector will face limitations. The United Kingdom originates almost 20% of loans for EU infrastructure projects, according to the City report.