COMMENTARY: A layman’s view of Brexit economy

By Dickson Igwe, Contributor

Now, this economics layman was never in favour of Brexit. He enjoys, and values his status as a Virgin Islands citizen, British citizen, and a citizen of Europe. He doesn’t fancy having to apply for a visa to visit Paris and Vienna, add Rome, and Barcelona, which he intends to do some day. He would never have had to apply for a visa before Brexit; after Brexit, he might just have to.

Then, the world is increasingly polarized. It is composed of powers that dominate their various regions. Staying within the geopolitical radius of these hub nations simply makes sense, economically, and geopolitically.

The Americas led by the USA are one block notwithstanding the ‘buffoonery’ of Donald Trump. China and East Asia are another. Europe, with the rich northern European countries, at the helm, is the third polarity. The rest of the world’s nations have to make their way in an ocean controlled by these three behemoths. That is the present day global power play. That present power arrangement may change in the future. Today, it is what it is.

The mighty investor, the one percent that controls the global economy understands this geopolitical reality. And that is why the British pound has dropped significantly since the Brexit referendum. The drop in the Pound is a boost for British exports, especially tourism.

However, a falling Pound has driven up inflation by making imported products more expensive. Britain is a net import economy, especially for tangible products such as electronics and appliances. The main reason the Pound has dropped however, has more to do with a loss of confidence in Britain by international investors.

The decision to leave Europe is a psychological conundrum. It is a consumer psychology of fear of the future that has pushed up market prices. Economics is first and foremost about mindset and psychology. British consumers are feeling the pinch as Brexit commenters and global finance pundits beat the anti-Brexit drum. Britons are increasingly aware that Brexit is a ‘walk in the dark, a dive into unfathomable waters.’

In a service driven economy, and an increasingly non-manufacturing retail economy, if earnings remain in negative territory for a prolonged period, then the economy is especially vulnerable to a recession triggered by falling demand. Consumer confidence is a key factor in the prosperity of service driven economies.

In fact, the Office for Budgetary Responsibility (OBR), the UK’s fiscal watchdog, on Thursday July 13, warned that a Brexit driven recession was inevitable. The OBR further stated that Britain’s public finances were in worse shape to withstand a recession than 10 years ago, on the eve of the great financial crash, and that Brexit made matters even direr.

Global investors view Brexit as a “bad idea”. For investors, Britain as part of a United Europe is a wonderful proposition for their businesses. Seventy thousand city jobs are at risk from Brexit if financial services take a hit according to some new numbers.

There is a lot of evidence pointing to economic trouble for Britain as a result of the Brexit decision. Recent data shows household income in the UK falling at the fastest rate since 1976. British workers are worse off post the Brexit referendum than they were before the collapse of Lehman Brothers in 2008. Savings rates have crashed.

Larry Elliot writing in the UK Guardian on June 30, 2017, has described economic growth in Britain as coming to a screeching halt. Inflation is rising. Wages have stalled. Savings have crashed because consumers are drawing on savings to maintain spending levels.

In fact, Britain may be on the verge of recession according to a number of pundits. There is evidence that since Brexit, Britain is ‘in the grip of the most protracted squeeze on living standards since the economic crisis of the mid 1970s’.

Elliott has described how, against a backdrop of rising prices and stagnant wage growth, incomes adjusted for inflation have fallen for three successive quarters. This is the first time since 1976, when the IMF had to rescue Britain from financial crisis.

There is more bad news. Household borrowing increased in May to 2 .4 billion dollars about 1.7 billion pounds. This was 420 million dollars more than predicted. This was not positive borrowing: borrowing based on consumer confidence. This was borrowing on credit cards and home and loan finance coupled with a steep decline in consumer confidence. In other words: borrowing in desperation, borrowing to maintain unsustainable lifestyles. Borrowing in a contracting economy is never a good thing.

It speaks of a country with consumers living above their means.

It gets even worse. Saving less and borrowing more has not increased demand. Demand in the market has declined in spite of increased borrowing. The Bank of England has observed that spending in the shops, new car sales, and property transaction, have all weakened. The bank has expressed concern about rising consumer debt that appears unsustainable.

Now, in the light of all of this ominous economic new, Vince Cable a prominent British politician had the audacity to state recently that Brexit may never happen.

This Economics layman hopes Cable is right.