Brexit : 1 year after, what assessment for the british economy ?

Euler Hermes, the global leader in credit insurance, analysis of the first visible impacts of the Brexit. A year after the referendum, how is the british economy ? Households, businesses, investors : who have been the most affected by the vote pro-Brexit ?

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British households are the first to pay the bill

From may 2016, the pound sterling has lost 9% of its value in real effective terms, and by 13% against the euro. The invoice for the goods in import is increased of british companies, resulting in a steep rise of inflation, to +2.9 percent y/y in may 2017 (both+0.3% y/y last year). On their side, the real wages contracted 0.2% y/y in march 2017 (both+1.7% y/y last year). “In this context, the purchasing power of british households is severely handicapped. Household consumption grew by only +0.2% q/q in Q1 2017 (+0,6% y/y in the past year), and this is not expected to improve. We believe that it should slow to +1.9% in 2017, after +2.8% in 2016, ” said Ana Boata, economist in charge of Western Europe at Euler Hermes.

Furthermore, while the savings rate reached its lowest level since 1963 in the last quarter of 2016 (to 3.3% of gross disposable income), households ‘ confidence shows less resilient than in the past. “With a mat of protection over end, and future prospects deemed bleak, british households are expected to restrict their future spending,” adds Ana Boata.

The british companies keep the cap surface

In the United Kingdom, inflation maintains artificially the numbers of business enterprises. In April 2017, they have increased by +4.5% y/y in industry (+0.4 per cent y/y in the past year). “Because of the strong depreciation of the pound, the input prices increasing faster than selling prices. As uk businesses are heavily dependent on foreign suppliers, their profitability is in danger, ” confirms Ana Boata. In addition, in order to stabilize the pound sterling, the Bank of England may raise its policy rate in h2 2017, which would weigh further on the margins of the companies. This could be achieved through a deterioration of the payment behaviour. In fact, in the past 3 quarters, the business failures in the Uk are increasing, and Euler Hermes expects an increase of +5% in 2017 and +6% in 2018.

Two sectors show now signs of weaknesses in the Uk given the strong deterioration of the purchasing power of households: (i) retail trade, sales of which believed that of +2.1% y/y, less than half compared to last year ; (ii) the construction sector where the growth in sales prices in the residential sector has slowed to +0.6% y/y in may 2017 (+5,1% y/y in the past year), and the number of home loans granted fell by -3% y/a. slowing, which is all the more worrying for these sectors, given the prospects to the decline in the purchasing power of british households.

A growing uncertainty that is holding back the attempts of foreign investors

At the end of may, the number of mergers and acquisitions in the Uk increased by +6% y/a. But at the same time, the total value of these transactions fell by -35% y/a. ” The vote pro-Brexit encourages foreign investors to be more careful. Why invest amounts that are consequential, in the United Kingdom prior to learn more about the future trade relations between the country and the EU ? Without clear perspectives on the future of the british, many of the operations have been queued. Thus, the number of mergers and acquisitions put on hold has increased +73% y/y at the end of may 2017, ” concludes Ana Boata. Finally, the GDP of the United Kingdom only expected to grow by +1.4% in 2017 and +1% in 2018, after +1.8% in 2016.

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