Daily Management Review

Growth Conviction Eludes With Prolonged Unsolved Brexit Concerns: Goldman Sachs


04/27/2019


Tight labour market, less capital investment, and reduced productivity could affect the efficiency of Britain’s economy.



The prolonged Brexit journey is proving injurious to the “fifth largest economy” of the world as it faces “dwindling company investment”, growth hindrance from productivity and signs of looming shocks in labour sector, observed Goldman Sachs.
 
Brexit was due on March 29, while the Prime Minister May hasn’t managed to secure a deal with parliament’s approval for the same. At present, the deadline has been extended to October 31. This leaves us at an unclear turn about “when, how and even if Brexit will happen”.
 
In a note to its clients, Goldman Sachs revealed that it had taken, in its base scenario, the divorce deal “would be ratified by May 22” which came with a risk of a delay in Brexit execution being closer to the “new Oct. 31 deadline”. Goldman Sachs’ note titled “Brexit — Withdrawal Symptoms” read:
“The politics of Brexit have become more protracted and, as a result, the side-effects of Brexit on the UK economy have intensified”
“From both a top-down and a bottom-up perspective, Brexit has taken a toll on the UK economy — even though it has not yet happened”.
 
Ever since the mid 2016, the British economy has failed to perform at par to the “other advanced economies”, whereby losing as much as “2.5 percent” of GDP, while weak investment tops the chart. Mark Carney, Governor BoE had said in February that the country had “lost around 1.5 percent of GDP” in comparison to the expectations set by the Central Bank prior to the referendum. Further, as per this month’s statement of Carney, the uncertainties have shot “through the roof” due to the delay.
 
 
While Goldman further stated that corporate capital expenditure seems to be “particularly subdued”, while the “strong employment data” hides the intensifying “misallocation of resources to labour” which might eventually turn the “economy less efficient”.
 
The economists at Goldman also observed that following the referendum, firms were busy hiring workers instead of investing in capital. Ever since June 2016, there has been only 0.3% growth in business investment.
 
On the other hand, the labour market exhibit tight situation with unemployment figures being at the “lowest since early 1975” while the pay is increasing at the “fastest pace in over a decade”; these together seem to point towards strain as oppose to resilience. In the words of Goldman’s economists:
“The balance between weaker demand for workers and a shorter supply of workers bears the hallmarks of a Brexit-induced labour market shock”.
 
Furthermore, they also added that combination of low investment and a “tight labour market” could affect the “overall efficiency” of the economy which in turn would “accentuate the chronic underperformance of UK productivity”.
 
Corporate leaders are already turning to “contingency plans” to deal with the situation in case Brexit meets with “additional checks” which is feared to “clog ports, silt up the arteries of trade and dislocate supply chains in Europe and beyond”. Moreover, there is also a fear of Brexit making Britain poorer by dividing the West.
 
The supporters of Brexit claim that the disruption will be short-lived while in the long-term view the U.K. will prosper provided the country is kept isolated from “German-dominated unity and excessive debt-funded welfare spending”. In Goldman’s words:
“Until the UK’s departure from the EU is resolved, it is difficult to have conviction in a strong rebound in growth. In 2020, with Brexit resolved, we do expect a pick-up in activity as uncertainty abates.”
 
 
 
References:
reuters.com







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