Brexit's dark shadow over the UK economy

Brexit's dark shadow over the UK economy
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In the run up to the June 2016 referendum, Brexit proponents promised that leaving Europe would be like a walk in the park. Three and a half years later, the reality has turned out to be very different from the rosy Brexit scenario that was sold to the UK electorate.

During the Brexit referendum campaign, Boris Johnson never tired of claiming that in its Brexit negotiations the UK would be able to have its cake and eat it too. He also offered the alluring image of the UK becoming a thriving Singapore-on-the-Thames once it was freed from Europe’s onerous regulations and once the UK was free to strike its own free trade deals.

And then the UK was mugged by reality. The UK is yet to get a Brexit Withdrawal Deal forcing it to ask Europe for another extension in the Brexit negotiating period to January 31, 2020 so as to avoid crashing out of Europe without a deal. Needless to add, the UK is also yet to enter the next and more difficult phase of the Brexit negotiations with its European partners that will determine the UK’s long-term economic relationship with Europe.

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In the meantime, Brexit has already upended UK politics for the worse as evidenced by a highly divided parliament that has been unable to agree to a Brexit deal. Sadly, as the country now heads to a parliamentary election on December 12 against the backdrop of a great degree of political fragmentation, there is no certainty that the UK will emerge from its political deadlock. Nor is there any certainty that it will avoid the prospect of another hung parliament that once again will be unable to agree on a Brexit deal.

Equally troubling for the country’s long-term political outlook is the impetus that the Brexit deal negotiated by Prime Minister Boris Johnson has given for a second Scottish independence referendum.

By accepting the idea that the UK’s border with Ireland would be drawn in the Irish Sea and that, after Brexit, Northern Ireland would de facto remain in the European Single Market, questions are being raised in Scotland whether it should not be accorded the same treatment as Northern Ireland.

Specifically, it is being asked whether Scotland should not be allowed to have a second independence referendum to decide whether or not to leave the United Kingdom and remain in Europe after Brexit.

On the economic front, the Bank of England keeps warning about the dire consequences of the UK leaving Europe without a deal. Fearing that a no deal Brexit would severely limit the UK’s access to the European Single Market, which buys around one half of the UK’s exports, the Bank estimates that over the next two years UK GDP could drop by more than 5 percent relative to where it would otherwise have reached.

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While the Bank of England’s grim economic warning about a no-deal Brexit can be subject to debate, there’s no debating that the economic and political uncertainty surrounding Brexit have already exacted a major toll on the UK economy.

Indeed, the country now seems to be on the cusp of an economic recession, while over the past three years it has gone from being the strongest economic performer among the G-7 countries to being the weakest. At the same time, while the level of investment among the G-7 countries has increased by around 10 percent since 2016, investment in the UK has shown virtually no growth.

One has to hope that the forthcoming UK election will break the country’s current political stalemate that would allow it to finally get parliamentary agreement on a  Brexit Withdrawal Deal. One also has to hope that in the next phase of the Brexit negotiations, the UK will be able to quickly agree with its European partners on a sensible final destination for EU-UK economic relations that will maintain the UK’s favorable access to the European market.

But judging by Boris Johnson now seeming to be campaigning on a hard-Brexit platform to fend off an electoral challenge from Nigel Farage’s Brexit party, I would not advise betting the house on any early lifting of UK economic uncertainty. Nor would I advise betting on any early reversal in the UK’s recent political and economic decline.  

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund's Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.