Articles Britain

Everything is fine. Right?

Britain is yet to leave the EU. The economic effects of the Brexit referendum, however, are already putting a strain on the economy

An economy can be defined as a broad set of inter-related production and consumption activities that help to determine how scarce resources are distributed. An economy that is in excellent health is characterised by high employment, low and stable inflation, growth and international competitiveness. The effect of each of the characteristics is an increase in the living standards. Brexit and the resulting uncertainty about the economy’s long-term prospects outside the EU are likely to threaten the economic welfare of British citizens.

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Since the third quarter of 2012, the GDP growth has been positive, ranging from 0.4% to 1%. The unemployment rate is low. According to the ILO, unemployment in the UK fell to 4.3% in September 2017, which is the lowest it has been in 43 years. Low and decreasing unemployment means that the standards of living of fewer citizens are being negatively influenced by the fall in income that is a result of unemployment.

However, inflation is close to exceeding the limit set by the Bank of England. It has risen to its highest level since the first quarter of 2012. On 1 September 2017, inflation climbed to 2.9%, its highest point since April 2012. Inflation targets set by the Bank of England are between 1% and 3% (2% allowing for a mistake of + or -1%) and seeing as the current rate is 2.9% and is projected to rise over the threshold by December. If prices are increasing faster than incomes, then the living standards of the average person decline. High inflation discourages households to spend to fulfil their everyday needs, reducing consumer spending, which is a driving force of UK economic growth.

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Furthermore, the UK economy is experiencing low international competitiveness. International competitiveness is measured by a country’s balance of payments – how much the country exports compared to how much it imports. Although the balance of trade in services is £8.75 billion, the balance of trade in goods is -£11.55 billion, resulting in a net deficit of -£2.8 Billion. A net deficit means that the UK government must borrow or rely on FDI to make up the difference. Seeing as FDI into the UK has fallen from £11 billion to £583 million between January and April of last year, it will not be enough to fill the deficit. What’s more, a large deficit means that the government has to increase spending to reduce this debt, which will drive up inflation due to more money in circulation.

Despite the signs that the UK economy was gaining momentum in the second quarter of 2017, the UK economy is not in excellent health. A key characteristic of a healthy economy is high consumer spending; it accounts for 60% of UK’s GDP, and high inflation has had a significant impact on this. Consumer spending has fallen by 0.4% from the previous year as the effect of Brexit on the UK currency continues to raise living costs.

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