Managerial Economics Coursework
Brexit and Trade Agreements
2016/2017 Syndicate Group 6:
Gamal Abdalla
Mara Kotrotsou
Tejiri Lajuwomi
Vasileios
Yousef Kholeif
1. What is likely to be the short run (1-2 years) impact of Brexit on the UK economy? Please assess the evidence to date (a few months after the vote) and what it tells us about 2017 and 2018.
According to a meta-analysis by the Institute for Fiscal Studies (IFS) (Emmerson, Johnson, Mitchell, & Phillips, 2016) 12 of the 14 major organisations studying the implications of Brexit predicted it would have a negative economic impact in the short-run (1-2 years). This is believed to be due to a combination of factors including currency devaluation, uncertainty reducing velocity of money, rise in borrowing cost, and inflation. Uncertainty fuels several behaviours domestically, mainly consumer’s expectations of economic instability lead to reduction in consumption and investment in higher risk ventures. Reduced consumption and investment drives out foreign investment (Emmerson et al., 2016). The immediate impact a few days following the vote to leave the EU was a large drop in equities across European stock markets (Ruparel, 2016).
HM treasury conducted a short-run analysis in May reporting that leaving the EU could cause a severe economic shock large enough to trigger a recession and rampant unemployment. To quantify this severe shock it translates to a 6% reduction in GDP, 15% currency devaluation, 2.7% inflation and 800,000 more unemployed within two years (Osborne, 2016). A pro-Brexit group have accused the treasury of using flawed modelling practises and released their latest post-Brexit analysis predicting a 2.3% GDP growth in 2016 – arguing that detaching from the EU’s protectionist trading policy and embracing global free trade will benefit the UK in both the short and long run (Economists for Brexit, 2016).
Following events over the last few months, in August we see investor outflows of approximately £5.7bn from the UK stock market. Stocks plummeted immediately after the Brexit vote, whilst the FTSE 100 has since rose to an eleven month high following Theresa May being appointed Prime Minister (Rodionova, 2016). In September and October 2016, British stocks approach a record high yet the currency approaches its lowest point in 31 years falling from $1.50 in June 23rd to $1.27 a few days later. Nevertheless, economic activity appears to have seen an uplift partly a result of the weaker exchange rate making UK exports more competitive. Considering that 75% of the FTSE 100’s company earnings take place overseas, the lower exchange rate artificially inflates the UK’s reported earnings. Lower exchange also means cheaper holidays to the UK resulting in a 7.1% increase in inbound flights. Inflationary pressures drove the rate up from 0.5%-1% between June-October and unemployment has reached an 11 year low with permanent employment numbers reaching 2009 financial crisis levels (BBC, 2016).
Not as catastrophic an outcome as many had predicted, however we expect this could be a result of behind the scenes operations of the BoE’s unprecedented monetary policy absorbing most of the short-term shock. On August 4th it reduced the interest rate to 0.25% and announced its biggest quantitative easing initiative to date with plans to purchase £60bn of assets from the private sector over the next 6 months. (Faulconbridge, McGeever, & Milliken, 2016). It is hard to say if the full shock is yet to be felt when Theresa May triggers Article 50 in March.
2. If the UK were to come to have the same trading relation with the EU as does the US or Japan today would this be harmful to national income and prosperity?
There are currently three broad types of trade arrangements where the EU is involved. The first involves the single market within the full member states. The single market aims to serve the needs of 500 million Europeans based on the principle of free movement of people, goods and services achieved mainly through prohibition of custom duties, quantitative restrictions and uniform legislation. It is estimated that the openness of the single market has increased trade in the EU by 15% over 10 years and has created 2.5 million more jobs (Maciejewski & Dancourt 2016).
The second type of trade agreement involves the European Economic Area (EEA), formed by the EU and the members of European Free Trade Association (EFTA), which are Norway, Iceland, Lichtenstein and Switzerland. The EFTA agreements refer to aspects other than trade alone and reflect the principle of free movement of goods, services, people and capital within the single market. Switzerland differs in that it has access to the single market but the rade relations with the EU are governed via over 120 bilateral agreements. Such a model is difficult to manage and slow to evolve to follow changes in EU legislation (Bahadir & Garces de los Fayos 2016). The third type of trade agreement is between the EU and non EU/non EEA countries, which relies mainly on either World Trade Organisation rules with higher tariffs or individually negotiated trade agreements. Any imposed tariff can affect the openness of trade and decreases trade flows which in its turn affects productivity. It will be difficult to substitute this lost trade with tariff based FTAs (Ebell 2016).
The volume of expected trade between two parties can determine the elements of a free trade agreement. The US and the EU are major trading partners (Gambini et al. 2015). The relationship between the EU and the UK is different. Over the last eighteen months export from the UK to the EU has ranged between 38-51%. Over the same period import to the UK from the EU has ranged between 45-56%. The EU remains the top trading partner for the UK in both imports and exports, but the UK accounts for only 6.7% of imports to the EU (Holmes 2016). The UK is a net importer (OEC 2016) (OTS Release September 2016), this suggests that the UK may not have a stronger negotiating position. The estimates on GDP reduction vary from -4.5% to -6.6%, however, some fail to quantify the effect but do not deny it (Emmerson et al. 2016)
The UK specialises in services and therefore services need to be included in a trade agreement. This is difficult to achieve especially in a free trade agreement without overlap of policies, which is one of the main points of Brexit (Holmes 2016).
Negotiation of new trade agreements is notoriously protracted and laborious. The extent of these negotiations will be unprecedented requiring massive resources that will be costly. Negotiations can easily extend over a minimum of six years (Nell & Baker 2016).
At the same time until the final trade agreements are in place uncertainty will persist. Uncertainty slows economic growth and investment and it is estimated that in broad figures it can reduce the GDP by 1% per year it continues. The prolonged uncertainty is also expected to affect the foreign direct investment, which directly leads to reduced productivity (Emmerson et al. 2016).
3. Is there much evidence that the high levels of immigration of the past 10 years have boosted the living standards of the population that was already in the UK?
The level of immigration in the UK has increased significantly in the last decade after the enlargement of the European Union and the entry of the “A8” East European countries (Wadsworth et al, 2016). For the most part there is evidence to suggest that the impact of immigration on the living standards of UK citizens is rather positive. For instance, unskilled labour costs are cheaper relative to a society without immigrants. Whilst this puts unskilled UK labourers out of work it creates significant overall benefits for the economy as UK customers gain access to the same goods and services for cheaper (The economic impact of immigration, 2008). Moreover, based on Dustmann et al. (Dustmann, Frattini, & Preston, 2013), over the last 10 years immigrants contributed towards a positive public revenue and helped prevent a rapid increase of UK’s national long term debt (Office for Budget Responsibility, 2013).
The amount of public funding spent on EU immigrants is limited when you exclude childhood education and healthcare costs. On average the immigrant pool is highly skilled, have higher levels of education, and are taxed more. The outcome is a proportionally higher contribution being made towards the UK’s education and healthcare infrastructure. A study (Geay, McNally, & Telhaj, 2013) on the effect of immigration on the educational system observed that dealing with a non-native speaking language motivates young immigrants to work harder at school and maintain a higher level of overall achievement. As far as the NHS is concerned, it has found that the usage of services and hospitals is balanced between the immigrants and UK citizens (Wadsworth J.,2013), while the waiting time has been slightly increased in recent years (Giuntella et al, 2015).
The biggest concern related to immigration comes with the increased demand for public housing (Sa, 2015). Immigration places additional pressure on a domain that is insufficiently developed. As for private housing, if the rate of immigration continues to rise, house prices will follow in the long term due to the lack of appropriate infrastructure (Hilber, 2015). Moreover, regarding the economic impact expressed as GDP per capita change, it seems to be rather small although the performance of UK economy has been weaker since 2008 and the economic crisis (Devlin, Bolt, Patel, Harding, & Hussain, 2014). On the unemployment front there is a possibility that young people who are by definition not yet considered skilled, are negatively affected by the immigration. However there is no clear evidence based on current findings.
Overall the economic effect of immigration on the population seemed to be fairly small in the long term as it is offset by additional contributions by the highly skilled sector. The significant decrease in wages that was observed after 2008 is more closely linked to the global financial crisis and a weak economic recovery (Devlin, Bolt, Patel, Harding, & Hussain, 2014). It is possible that the unskilled workforce that are experiencing the greatest negative impact from immigration are more likely to lobby government than the masses gaining a small incremental benefit. The majority of recent studies suggest a positive impact of the immigrants to the living standards of the population that was already in UK in the last 10 years. However, there are some concerns that should be studied carefully to avoid misleading interpretations of research outcomes.
References
BBC. (2016). Brexit Britain: What has actually happened so far? – BBC News. Retrieved from http://www.bbc.co.uk/news/business-36956418
Bahadir, A. & Garces des los Fayos, F., 2016. The European Economic Area (EEA), Switzerland and the North | EU fact sheets | European Parliament. European Parliament. Available at:
http://www.europarl.europa.eu/atyourservice/en/displayFtu.html?ftuId=FTU_6.5.3.html
Devlin, C., Bolt, O., Patel, D., Harding, D., & Hussain, I. (2014). Impacts of migration on UK native employment: An analytical review of the evidence. Department for Business Innovation & Skills Report.
Dustmann, C., Frattini, T., & Preston, I. (2013). The Effect of Immigration along the Distribution of Wages. Review of Economic Studies.
Ebell, M., 2016. Assessing the impact of trade agreements on trade | National Institute of Economic and Social Research. Review No 238 National Institute of Economic and Social Research. Available at: http://www.niesr.ac.uk/publications/assessing-impact-trade-agreements-trade#.WDsu8qKLR-U.
Economists for Brexit. (2016). Latest GDP figures: Treasury must now publicly reject all pre-Brexit forecasts — Economists for Brexit. Retrieved from http://www.economistsforbrexit.co.uk/latest-gdp-figures
Emmerson, C., Johnson, P., Mitchell, I., & Phillips, D. (2016). Brexit and the UK’s Public Finances. Institute for Fiscal Studies.
Faulconbridge, G., McGeever, J., & Milliken, D. (2016). Pound down, stocks up, economy flat: What do Brexit swings mean for you? | Reuters. Retrieved from http://uk.reuters.com/article/uk-britain-eu-idUKKCN1251X4
Gambini, G., Istatkov, R. & Kerner, R., 2015. USA-EU – international trade and investment statistics – Statistics Explained. Eurostat. Available at:
http://ec.europa.eu/eurostat/statistics-explained/index.php/USA-EU_-_international_trade_and_investment_statistics
Geay, C., McNally, S., & Telhaj, S. (2013). Non-Native Speakers in the Classroom: What are the Effects on Pupil Performance? Economic Journal, 281-307.
Giuntella, O., Nicodemo, C., & Vargas Silva, C. (2015). The Effects of Immigration on NHS Waiting Times. University of Oxford Working Paper.
Hilber, C. (2015). UK Housing and Planning Policies. CEP Election Analysis No. 3 .
Holmes, P., Rollo, J. & Winters, L A., 2016. Negotiating the UK’s post-Brexit trade arrangements | National Institute of Economic and Social Research. Review No 238 National Institute of Economic and Social Research. Available at:
http://www.niesr.ac.uk/publications/negotiating-uk’s-post-brexit-trade-arrangements#.WDtGEzucKT8
Maciejewski, M. & Dancourt, L., 2016. The internal market: general principles | EU fact sheets https://ssl.gstatic.com/s2/profiles/images/silhouette96.png| European Parliament. European Parliament. Available at: https://ssl.gstatic.com/s2/profiles/images/silhouette96.pnghttp://www.europarl.europa.eu/atyourservice/en/displayFtu.html?ftuId=FTU_3.1.1.html.
McGuinness, F., & Hawkins, O. (2016). Impacts of immigration on population and the economy. House of Commons Library.
Nell, J. & Baker, M., 2016. The UK economics chartbook| EU Exit Morgan Stanley Research group.
OEC, 2016. OEC – United Kingdom (GBR) Exports, Imports, and Trade Partners. OEC.
Available at: http://atlas.media.mit.edu/en/profile/country/gbr/.
OTS Release September 2016. Available at:https://www.uktradeinfo.com/Statistics/OverseasTradeStatistics/Pages/EU_and_Non-EU_Data.aspx
Osborne, G. (2016). HM Treasury analysis: the immediate economic impact of leaving the EU. HM Treasury.
Sa, F. (2015). Immigration and House Prices in the UK. Economic Journal, 1393-1424. (2008). The economic impact of immigration. London: Authority of the House of Lords.
Rodionova, Z. (2016). Brexit latest: Investors pull £5bn from UK stock market funds after EU referendum | The Independent. Retrieved from http://www.independent.co.uk/news/business/news/brexit-latest-investors-pull-5bn-from-uk-stock-market-funds-after-eu-referendum-a7206836.html
Ruparel, R. (2016). In Short Run, Brexit Selloff Will Bring Buying Opportunity; In Long Run, Radical Reform Needed To Support U.K. Economy. Retrieved November 25, 2016, from http://www.forbes.com/sites/raoulruparel/2016/06/24/markets-fall-as-uk-plumps-for-brexit-what-happens-next/#409c4be04f40
Wadsworth, J., Dhingra, S., Ottaviano, G., & Van Reenen, J. (2016). Brexit and the Impact of Immigration on the UK. Centre for Economic Performance, London School of Economics.
Wadsworth, J. (2013). Mustn’t Grumble: Immigration, Health and Health Service Use in the UK and Germany. Fiscal studies, 55-82.
Managerial Economics Coursework
Brexit and Trade Agreements
2016/2017 Syndicate Group 6:
Gamal Abdalla
Mara Kotrotsou
Tejiri Lajuwomi
Vasileios
Yousef Kholeif
1. What is likely to be the short run (1-2 years) impact of Brexit on the UK economy? Please assess the evidence to date (a few months after the vote) and what it tells us about 2017 and 2018.
According to a meta-analysis by the Institute for Fiscal Studies (IFS) (Emmerson, Johnson, Mitchell, & Phillips, 2016) 12 of the 14 major organisations studying the implications of Brexit predicted it would have a negative economic impact in the short-run (1-2 years). This is believed to be due to a combination of factors including currency devaluation, uncertainty reducing velocity of money, rise in borrowing cost, and inflation. Uncertainty fuels several behaviours domestically, mainly consumer’s expectations of economic instability lead to reduction in consumption and investment in higher risk ventures. Reduced consumption and investment drives out foreign investment (Emmerson et al., 2016). The immediate impact a few days following the vote to leave the EU was a large drop in equities across European stock markets (Ruparel, 2016).
HM treasury conducted a short-run analysis in May reporting that leaving the EU could cause a severe economic shock large enough to trigger a recession and rampant unemployment. To quantify this severe shock it translates to a 6% reduction in GDP, 15% currency devaluation, 2.7% inflation and 800,000 more unemployed within two years (Osborne, 2016). A pro-Brexit group have accused the treasury of using flawed modelling practises and released their latest post-Brexit analysis predicting a 2.3% GDP growth in 2016 – arguing that detaching from the EU’s protectionist trading policy and embracing global free trade will benefit the UK in both the short and long run (Economists for Brexit, 2016).
Following events over the last few months, in August we see investor outflows of approximately £5.7bn from the UK stock market. Stocks plummeted immediately after the Brexit vote, whilst the FTSE 100 has since rose to an eleven month high following Theresa May being appointed Prime Minister (Rodionova, 2016). In September and October 2016, British stocks approach a record high yet the currency approaches its lowest point in 31 years falling from $1.50 in June 23rd to $1.27 a few days later. Nevertheless, economic activity appears to have seen an uplift partly a result of the weaker exchange rate making UK exports more competitive. Considering that 75% of the FTSE 100’s company earnings take place overseas, the lower exchange rate artificially inflates the UK’s reported earnings. Lower exchange also means cheaper holidays to the UK resulting in a 7.1% increase in inbound flights. Inflationary pressures drove the rate up from 0.5%-1% between June-October and unemployment has reached an 11 year low with permanent employment numbers reaching 2009 financial crisis levels (BBC, 2016).
Not as catastrophic an outcome as many had predicted, however we expect this could be a result of behind the scenes operations of the BoE’s unprecedented monetary policy absorbing most of the short-term shock. On August 4th it reduced the interest rate to 0.25% and announced its biggest quantitative easing initiative to date with plans to purchase £60bn of assets from the private sector over the next 6 months. (Faulconbridge, McGeever, & Milliken, 2016). It is hard to say if the full shock is yet to be felt when Theresa May triggers Article 50 in March.
2. If the UK were to come to have the same trading relation with the EU as does the US or Japan today would this be harmful to national income and prosperity?
There are currently three broad types of trade arrangements where the EU is involved. The first involves the single market within the full member states. The single market aims to serve the needs of 500 million Europeans based on the principle of free movement of people, goods and services achieved mainly through prohibition of custom duties, quantitative restrictions and uniform legislation. It is estimated that the openness of the single market has increased trade in the EU by 15% over 10 years and has created 2.5 million more jobs (Maciejewski & Dancourt 2016).
The second type of trade agreement involves the European Economic Area (EEA), formed by the EU and the members of European Free Trade Association (EFTA), which are Norway, Iceland, Lichtenstein and Switzerland. The EFTA agreements refer to aspects other than trade alone and reflect the principle of free movement of goods, services, people and capital within the single market. Switzerland differs in that it has access to the single market but the rade relations with the EU are governed via over 120 bilateral agreements. Such a model is difficult to manage and slow to evolve to follow changes in EU legislation (Bahadir & Garces de los Fayos 2016). The third type of trade agreement is between the EU and non EU/non EEA countries, which relies mainly on either World Trade Organisation rules with higher tariffs or individually negotiated trade agreements. Any imposed tariff can affect the openness of trade and decreases trade flows which in its turn affects productivity. It will be difficult to substitute this lost trade with tariff based FTAs (Ebell 2016).
The volume of expected trade between two parties can determine the elements of a free trade agreement. The US and the EU are major trading partners (Gambini et al. 2015). The relationship between the EU and the UK is different. Over the last eighteen months export from the UK to the EU has ranged between 38-51%. Over the same period import to the UK from the EU has ranged between 45-56%. The EU remains the top trading partner for the UK in both imports and exports, but the UK accounts for only 6.7% of imports to the EU (Holmes 2016). The UK is a net importer (OEC 2016) (OTS Release September 2016), this suggests that the UK may not have a stronger negotiating position. The estimates on GDP reduction vary from -4.5% to -6.6%, however, some fail to quantify the effect but do not deny it (Emmerson et al. 2016)
The UK specialises in services and therefore services need to be included in a trade agreement. This is difficult to achieve especially in a free trade agreement without overlap of policies, which is one of the main points of Brexit (Holmes 2016).
Negotiation of new trade agreements is notoriously protracted and laborious. The extent of these negotiations will be unprecedented requiring massive resources that will be costly. Negotiations can easily extend over a minimum of six years (Nell & Baker 2016).
At the same time until the final trade agreements are in place uncertainty will persist. Uncertainty slows economic growth and investment and it is estimated that in broad figures it can reduce the GDP by 1% per year it continues. The prolonged uncertainty is also expected to affect the foreign direct investment, which directly leads to reduced productivity (Emmerson et al. 2016).
3. Is there much evidence that the high levels of immigration of the past 10 years have boosted the living standards of the population that was already in the UK?
The level of immigration in the UK has increased significantly in the last decade after the enlargement of the European Union and the entry of the “A8” East European countries (Wadsworth et al, 2016). For the most part there is evidence to suggest that the impact of immigration on the living standards of UK citizens is rather positive. For instance, unskilled labour costs are cheaper relative to a society without immigrants. Whilst this puts unskilled UK labourers out of work it creates significant overall benefits for the economy as UK customers gain access to the same goods and services for cheaper (The economic impact of immigration, 2008). Moreover, based on Dustmann et al. (Dustmann, Frattini, & Preston, 2013), over the last 10 years immigrants contributed towards a positive public revenue and helped prevent a rapid increase of UK’s national long term debt (Office for Budget Responsibility, 2013).
The amount of public funding spent on EU immigrants is limited when you exclude childhood education and healthcare costs. On average the immigrant pool is highly skilled, have higher levels of education, and are taxed more. The outcome is a proportionally higher contribution being made towards the UK’s education and healthcare infrastructure. A study (Geay, McNally, & Telhaj, 2013) on the effect of immigration on the educational system observed that dealing with a non-native speaking language motivates young immigrants to work harder at school and maintain a higher level of overall achievement. As far as the NHS is concerned, it has found that the usage of services and hospitals is balanced between the immigrants and UK citizens (Wadsworth J.,2013), while the waiting time has been slightly increased in recent years (Giuntella et al, 2015).
The biggest concern related to immigration comes with the increased demand for public housing (Sa, 2015). Immigration places additional pressure on a domain that is insufficiently developed. As for private housing, if the rate of immigration continues to rise, house prices will follow in the long term due to the lack of appropriate infrastructure (Hilber, 2015). Moreover, regarding the economic impact expressed as GDP per capita change, it seems to be rather small although the performance of UK economy has been weaker since 2008 and the economic crisis (Devlin, Bolt, Patel, Harding, & Hussain, 2014). On the unemployment front there is a possibility that young people who are by definition not yet considered skilled, are negatively affected by the immigration. However there is no clear evidence based on current findings.
Overall the economic effect of immigration on the population seemed to be fairly small in the long term as it is offset by additional contributions by the highly skilled sector. The significant decrease in wages that was observed after 2008 is more closely linked to the global financial crisis and a weak economic recovery (Devlin, Bolt, Patel, Harding, & Hussain, 2014). It is possible that the unskilled workforce that are experiencing the greatest negative impact from immigration are more likely to lobby government than the masses gaining a small incremental benefit. The majority of recent studies suggest a positive impact of the immigrants to the living standards of the population that was already in UK in the last 10 years. However, there are some concerns that should be studied carefully to avoid misleading interpretations of research outcomes.
References
BBC. (2016). Brexit Britain: What has actually happened so far? – BBC News. Retrieved from http://www.bbc.co.uk/news/business-36956418
Bahadir, A. & Garces des los Fayos, F., 2016. The European Economic Area (EEA), Switzerland and the North | EU fact sheets | European Parliament. European Parliament. Available at:
http://www.europarl.europa.eu/atyourservice/en/displayFtu.html?ftuId=FTU_6.5.3.html
Devlin, C., Bolt, O., Patel, D., Harding, D., & Hussain, I. (2014). Impacts of migration on UK native employment: An analytical review of the evidence. Department for Business Innovation & Skills Report.
Dustmann, C., Frattini, T., & Preston, I. (2013). The Effect of Immigration along the Distribution of Wages. Review of Economic Studies.
Ebell, M., 2016. Assessing the impact of trade agreements on trade | National Institute of Economic and Social Research. Review No 238 National Institute of Economic and Social Research. Available at: http://www.niesr.ac.uk/publications/assessing-impact-trade-agreements-trade#.WDsu8qKLR-U.
Economists for Brexit. (2016). Latest GDP figures: Treasury must now publicly reject all pre-Brexit forecasts — Economists for Brexit. Retrieved from http://www.economistsforbrexit.co.uk/latest-gdp-figures
Emmerson, C., Johnson, P., Mitchell, I., & Phillips, D. (2016). Brexit and the UK’s Public Finances. Institute for Fiscal Studies.
Faulconbridge, G., McGeever, J., & Milliken, D. (2016). Pound down, stocks up, economy flat: What do Brexit swings mean for you? | Reuters. Retrieved from http://uk.reuters.com/article/uk-britain-eu-idUKKCN1251X4
Gambini, G., Istatkov, R. & Kerner, R., 2015. USA-EU – international trade and investment statistics – Statistics Explained. Eurostat. Available at:
http://ec.europa.eu/eurostat/statistics-explained/index.php/USA-EU_-_international_trade_and_investment_statistics
Geay, C., McNally, S., & Telhaj, S. (2013). Non-Native Speakers in the Classroom: What are the Effects on Pupil Performance? Economic Journal, 281-307.
Giuntella, O., Nicodemo, C., & Vargas Silva, C. (2015). The Effects of Immigration on NHS Waiting Times. University of Oxford Working Paper.
Hilber, C. (2015). UK Housing and Planning Policies. CEP Election Analysis No. 3 .
Holmes, P., Rollo, J. & Winters, L A., 2016. Negotiating the UK’s post-Brexit trade arrangements | National Institute of Economic and Social Research. Review No 238 National Institute of Economic and Social Research. Available at:
http://www.niesr.ac.uk/publications/negotiating-uk’s-post-brexit-trade-arrangements#.WDtGEzucKT8
Maciejewski, M. & Dancourt, L., 2016. The internal market: general principles | EU fact sheets https://ssl.gstatic.com/s2/profiles/images/silhouette96.png| European Parliament. European Parliament. Available at: https://ssl.gstatic.com/s2/profiles/images/silhouette96.pnghttp://www.europarl.europa.eu/atyourservice/en/displayFtu.html?ftuId=FTU_3.1.1.html.
McGuinness, F., & Hawkins, O. (2016). Impacts of immigration on population and the economy. House of Commons Library.
Nell, J. & Baker, M., 2016. The UK economics chartbook| EU Exit Morgan Stanley Research group.
OEC, 2016. OEC – United Kingdom (GBR) Exports, Imports, and Trade Partners. OEC.
Available at: http://atlas.media.mit.edu/en/profile/country/gbr/.
OTS Release September 2016. Available at:https://www.uktradeinfo.com/Statistics/OverseasTradeStatistics/Pages/EU_and_Non-EU_Data.aspx
Osborne, G. (2016). HM Treasury analysis: the immediate economic impact of leaving the EU. HM Treasury.
Sa, F. (2015). Immigration and House Prices in the UK. Economic Journal, 1393-1424. (2008). The economic impact of immigration. London: Authority of the House of Lords.
Rodionova, Z. (2016). Brexit latest: Investors pull £5bn from UK stock market funds after EU referendum | The Independent. Retrieved from http://www.independent.co.uk/news/business/news/brexit-latest-investors-pull-5bn-from-uk-stock-market-funds-after-eu-referendum-a7206836.html
Ruparel, R. (2016). In Short Run, Brexit Selloff Will Bring Buying Opportunity; In Long Run, Radical Reform Needed To Support U.K. Economy. Retrieved November 25, 2016, from http://www.forbes.com/sites/raoulruparel/2016/06/24/markets-fall-as-uk-plumps-for-brexit-what-happens-next/#409c4be04f40
Wadsworth, J., Dhingra, S., Ottaviano, G., & Van Reenen, J. (2016). Brexit and the Impact of Immigration on the UK. Centre for Economic Performance, London School of Economics.
Wadsworth, J. (2013). Mustn’t Grumble: Immigration, Health and Health Service Use in the UK and Germany. Fiscal studies, 55-82.
Managerial Economics Coursework
Brexit and Trade Agreements
2016/2017 Syndicate Group 6:
Gamal Abdalla
Mara Kotrotsou
Tejiri Lajuwomi
Vasileios
Yousef Kholeif
1. What is likely to be the short run (1-2 years) impact of Brexit on the UK economy? Please assess the evidence to date (a few months after the vote) and what it tells us about 2017 and 2018.
According to a meta-analysis by the Institute for Fiscal Studies (IFS) (Emmerson, Johnson, Mitchell, & Phillips, 2016) 12 of the 14 major organisations studying the implications of Brexit predicted it would have a negative economic impact in the short-run (1-2 years). This is believed to be due to a combination of factors including currency devaluation, uncertainty reducing velocity of money, rise in borrowing cost, and inflation. Uncertainty fuels several behaviours domestically, mainly consumer’s expectations of economic instability lead to reduction in consumption and investment in higher risk ventures. Reduced consumption and investment drives out foreign investment (Emmerson et al., 2016). The immediate impact a few days following the vote to leave the EU was a large drop in equities across European stock markets (Ruparel, 2016).
HM treasury conducted a short-run analysis in May reporting that leaving the EU could cause a severe economic shock large enough to trigger a recession and rampant unemployment. To quantify this severe shock it translates to a 6% reduction in GDP, 15% currency devaluation, 2.7% inflation and 800,000 more unemployed within two years (Osborne, 2016). A pro-Brexit group have accused the treasury of using flawed modelling practises and released their latest post-Brexit analysis predicting a 2.3% GDP growth in 2016 – arguing that detaching from the EU’s protectionist trading policy and embracing global free trade will benefit the UK in both the short and long run (Economists for Brexit, 2016).
Following events over the last few months, in August we see investor outflows of approximately £5.7bn from the UK stock market. Stocks plummeted immediately after the Brexit vote, whilst the FTSE 100 has since rose to an eleven month high following Theresa May being appointed Prime Minister (Rodionova, 2016). In September and October 2016, British stocks approach a record high yet the currency approaches its lowest point in 31 years falling from $1.50 in June 23rd to $1.27 a few days later. Nevertheless, economic activity appears to have seen an uplift partly a result of the weaker exchange rate making UK exports more competitive. Considering that 75% of the FTSE 100’s company earnings take place overseas, the lower exchange rate artificially inflates the UK’s reported earnings. Lower exchange also means cheaper holidays to the UK resulting in a 7.1% increase in inbound flights. Inflationary pressures drove the rate up from 0.5%-1% between June-October and unemployment has reached an 11 year low with permanent employment numbers reaching 2009 financial crisis levels (BBC, 2016).
Not as catastrophic an outcome as many had predicted, however we expect this could be a result of behind the scenes operations of the BoE’s unprecedented monetary policy absorbing most of the short-term shock. On August 4th it reduced the interest rate to 0.25% and announced its biggest quantitative easing initiative to date with plans to purchase £60bn of assets from the private sector over the next 6 months. (Faulconbridge, McGeever, & Milliken, 2016). It is hard to say if the full shock is yet to be felt when Theresa May triggers Article 50 in March.
2. If the UK were to come to have the same trading relation with the EU as does the US or Japan today would this be harmful to national income and prosperity?
There are currently three broad types of trade arrangements where the EU is involved. The first involves the single market within the full member states. The single market aims to serve the needs of 500 million Europeans based on the principle of free movement of people, goods and services achieved mainly through prohibition of custom duties, quantitative restrictions and uniform legislation. It is estimated that the openness of the single market has increased trade in the EU by 15% over 10 years and has created 2.5 million more jobs (Maciejewski & Dancourt 2016).
The second type of trade agreement involves the European Economic Area (EEA), formed by the EU and the members of European Free Trade Association (EFTA), which are Norway, Iceland, Lichtenstein and Switzerland. The EFTA agreements refer to aspects other than trade alone and reflect the principle of free movement of goods, services, people and capital within the single market. Switzerland differs in that it has access to the single market but the rade relations with the EU are governed via over 120 bilateral agreements. Such a model is difficult to manage and slow to evolve to follow changes in EU legislation (Bahadir & Garces de los Fayos 2016). The third type of trade agreement is between the EU and non EU/non EEA countries, which relies mainly on either World Trade Organisation rules with higher tariffs or individually negotiated trade agreements. Any imposed tariff can affect the openness of trade and decreases trade flows which in its turn affects productivity. It will be difficult to substitute this lost trade with tariff based FTAs (Ebell 2016).
The volume of expected trade between two parties can determine the elements of a free trade agreement. The US and the EU are major trading partners (Gambini et al. 2015). The relationship between the EU and the UK is different. Over the last eighteen months export from the UK to the EU has ranged between 38-51%. Over the same period import to the UK from the EU has ranged between 45-56%. The EU remains the top trading partner for the UK in both imports and exports, but the UK accounts for only 6.7% of imports to the EU (Holmes 2016). The UK is a net importer (OEC 2016) (OTS Release September 2016), this suggests that the UK may not have a stronger negotiating position. The estimates on GDP reduction vary from -4.5% to -6.6%, however, some fail to quantify the effect but do not deny it (Emmerson et al. 2016)
The UK specialises in services and therefore services need to be included in a trade agreement. This is difficult to achieve especially in a free trade agreement without overlap of policies, which is one of the main points of Brexit (Holmes 2016).
Negotiation of new trade agreements is notoriously protracted and laborious. The extent of these negotiations will be unprecedented requiring massive resources that will be costly. Negotiations can easily extend over a minimum of six years (Nell & Baker 2016).
At the same time until the final trade agreements are in place uncertainty will persist. Uncertainty slows economic growth and investment and it is estimated that in broad figures it can reduce the GDP by 1% per year it continues. The prolonged uncertainty is also expected to affect the foreign direct investment, which directly leads to reduced productivity (Emmerson et al. 2016).
3. Is there much evidence that the high levels of immigration of the past 10 years have boosted the living standards of the population that was already in the UK?
The level of immigration in the UK has increased significantly in the last decade after the enlargement of the European Union and the entry of the “A8” East European countries (Wadsworth et al, 2016). For the most part there is evidence to suggest that the impact of immigration on the living standards of UK citizens is rather positive. For instance, unskilled labour costs are cheaper relative to a society without immigrants. Whilst this puts unskilled UK labourers out of work it creates significant overall benefits for the economy as UK customers gain access to the same goods and services for cheaper (The economic impact of immigration, 2008). Moreover, based on Dustmann et al. (Dustmann, Frattini, & Preston, 2013), over the last 10 years immigrants contributed towards a positive public revenue and helped prevent a rapid increase of UK’s national long term debt (Office for Budget Responsibility, 2013).
The amount of public funding spent on EU immigrants is limited when you exclude childhood education and healthcare costs. On average the immigrant pool is highly skilled, have higher levels of education, and are taxed more. The outcome is a proportionally higher contribution being made towards the UK’s education and healthcare infrastructure. A study (Geay, McNally, & Telhaj, 2013) on the effect of immigration on the educational system observed that dealing with a non-native speaking language motivates young immigrants to work harder at school and maintain a higher level of overall achievement. As far as the NHS is concerned, it has found that the usage of services and hospitals is balanced between the immigrants and UK citizens (Wadsworth J.,2013), while the waiting time has been slightly increased in recent years (Giuntella et al, 2015).
The biggest concern related to immigration comes with the increased demand for public housing (Sa, 2015). Immigration places additional pressure on a domain that is insufficiently developed. As for private housing, if the rate of immigration continues to rise, house prices will follow in the long term due to the lack of appropriate infrastructure (Hilber, 2015). Moreover, regarding the economic impact expressed as GDP per capita change, it seems to be rather small although the performance of UK economy has been weaker since 2008 and the economic crisis (Devlin, Bolt, Patel, Harding, & Hussain, 2014). On the unemployment front there is a possibility that young people who are by definition not yet considered skilled, are negatively affected by the immigration. However there is no clear evidence based on current findings.
Overall the economic effect of immigration on the population seemed to be fairly small in the long term as it is offset by additional contributions by the highly skilled sector. The significant decrease in wages that was observed after 2008 is more closely linked to the global financial crisis and a weak economic recovery (Devlin, Bolt, Patel, Harding, & Hussain, 2014). It is possible that the unskilled workforce that are experiencing the greatest negative impact from immigration are more likely to lobby government than the masses gaining a small incremental benefit. The majority of recent studies suggest a positive impact of the immigrants to the living standards of the population that was already in UK in the last 10 years. However, there are some concerns that should be studied carefully to avoid misleading interpretations of research outcomes.