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Brits are starting to think again about Brexit as the economy slides into recession

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Anti-Brexit protester Steve Bray (L) and a pro-Brexit protester argue as they demonstrate outside the Houses of Parliament in Westminster on January 08, 2019 in London, England.

LONDON — As evidence mounts of the long-term harm being inflicted on the U.K. economy by Brexit, the government is coming under pressure to acknowledge the elephant in the room.

Despite criticizing the Conservative government’s fiscal plans as the U.K. economy faces a recession and the sharpest fall in living standards since records began, the country’s main opposition Labour party on Tuesday ruled out a return to the EU’s single market or customs union if it wins the next general election — due no later than January 2025.

 

Labour leader Keir Starmer told a business conference that the party would instead “make Brexit work,” but economists have suggested that either or both of these measures would help to cushion the blow to the country’s long-term economic growth prospects.

The government has avoided addressing the impact of former Prime Minister Boris Johnson’s Brexit deal, with ministers attributing the country’s economic headwinds solely to the energy crisis arising from Russia’s war in Ukraine, and lingering effects from the Covid-19 pandemic.

However, the OECD forecast on Tuesday that only Russia would suffer a bigger economic contraction than the U.K. in 2023 among the G-20 (Group of Twenty) leading developed and developing economies. The 0.2% expansion projected in 2024 is the joint-weakest alongside Russia.

The U.K.’s growth prospects are lower even than Germany, whose economy is uniquely exposed to higher energy prices owing to its reliance on Russian gas imports. The OECD said “lingering uncertainty” alongside higher costs of capital would continue to weigh on business investment in the U.K., which has fallen sharply since Brexit.

The U.K.’s independent Office for Budget Responsibility (OBR) has offered a bleaker outlook, projecting a 1.4% GDP contraction in 2023, even as the Bank of England and the government are forced to tighten monetary and fiscal policy to contain inflation and prevent the economy overheating.

The OBR said in its economic and fiscal outlook last week that its trade forecast reflected an assumption that Brexit would result in the U.K.’s trade intensity (an economy’s integration with the world economy) being 15% lower in the long run than if the country had remained in the EU.

Trade intensity plunging

In May, the OBR estimated that the U.K.’s new terms of trade with the EU, set out in the Trade and Cooperation Agreement (TCA) that came into effect on Jan. 1, 2021, will reduce long-run productivity by 4% relative to the previous trajectory had the U.K. remained in the EU.

The Bank of England‘s Monetary Policy Committee issued a similar projection, and former BOE policymaker Michael Saunders told CNBC Monday that a key driver of weakness in the U.K. economy is reduced trade intensity due to Brexit, leading to lower productivity growth.

Saunders argued that there is “abundant evidence” that increased trade intensity — or greater openness to trade on both exports and imports — raises productivity growth.

“The U.K. has increased trade barriers with Europe and trade deals that have been done with other countries are largely just maintaining the status quo of trade with third countries — there’s been no significant net increase in trade intensity with non-EU countries,” he said.

“So the overall net effect has been a significant reduction in the U.K.’s trade intensity, which you can see in the big drop in both imports and exports as a share of GDP since 2019 compared to the trends in other advanced economies and compared to the trends that we saw in the preceding years.”

U.K. trade as a percentage of GDP has fallen from around 63% in 2019 to around 55% in 2021, while domestic productivity growth is also sluggish. Both the Bank of England and the OBR estimate that the U.K.’s potential output has fallen outright since the fourth quarter of 2019, and will endure anemic growth through the next few years.

New York-based Kroll Bond Rating Agency downgraded the U.K. even before former Prime Minister Liz Truss’ disastrous mini-budget in September sent bond markets into a tailspin.

Ken Egan, director of European sovereign credit at KBRA, told CNBC last week that Brexit marked a “turning point” for the U.K. as it gave rise to several structural weaknesses in the economy.

“Part of the reason for our downgrade was a longer term view that Brexit has had and will continue to have a negative impact on the U.K. from a credit perspective, in terms of everything from trade to government finances to the macroeconomic side of things.”

KBRA, like the OBR, Bank of England, International Monetary Fund, OECD and majority of economists, believes growth will be lower over the medium term as a result of Brexit.

“Trade has already suffered, the currency has weakened but we haven’t seen the offsetting improvement of trade, investment has really been the weak point since Brexit, business investment has really deteriorated quite sharply,” Egan explained.

“If you compare inflation in the current dynamic to the rest of the world, core services, core goods inflation in the U.K. seems to be a lot higher than the rest of Europe. It’s that idea that even if the energy crisis was over tomorrow, you’d still have these stickier inflation pressures in the U.K.”

Public mood shifting

Saunders said that while part of the deterioration since the fourth quarter of 2019 was down to the coronavirus pandemic, Brexit also had a part to play as increased trade barriers with the EU for firms since the start of 2021 stymied activity.

“If you don’t want to reverse Brexit fully, you can still go for a softer Brexit than the U.K. chose to do,” he suggested.

“The U.K. went for pretty much the hardest of hard Brexits and that was a choice, we could have left the EU but gone for a form of Brexit which would have put many fewer barriers in the way of trade, trade intensity would have suffered less, productivity would suffer less over time.”

New Prime Minister Rishi Sunak’s government is expected to pursue friendlier relations with the EU than either of his predecessors, Boris Johnson and Liz Truss. However, both the Conservatives and Labour have ruled out any return to EU-aligned institutions for fear of disenfranchising voters in key pro-Brexit constituencies.

Yet recent polling suggests that the public mood may have begun to turn. A frequent YouGov survey earlier this month showed that 56% of the population said Britain was “wrong” to vote to leave the EU in 2016, compared to 32% who said it was the right call.

The 24-point deficit was the largest in the series dating back to 2016, and almost one-fifth of Leave voters now believed Brexit was the wrong decision, which was also a record.

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Economy

Canada’s unemployment rate holds steady at 6.5% in October, economy adds 15,000 jobs

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November 8, 2024

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OTTAWA – Canada’s unemployment rate held steady at 6.5 per cent last month as hiring remained weak across the economy.

Statistics Canada’s labour force survey on Friday said employment rose by a modest 15,000 jobs in October.

Business, building and support services saw the largest gain in employment.

Meanwhile, finance, insurance, real estate, rental and leasing experienced the largest decline.

Many economists see weakness in the job market continuing in the short term, before the Bank of Canada’s interest rate cuts spark a rebound in economic growth next year.

Despite ongoing softness in the labour market, however, strong wage growth has raged on in Canada. Average hourly wages in October grew 4.9 per cent from a year ago, reaching $35.76.

Friday’s report also shed some light on the financial health of households.

According to the agency, 28.8 per cent of Canadians aged 15 or older were living in a household that had difficulty meeting financial needs – like food and housing – in the previous four weeks.

That was down from 33.1 per cent in October 2023 and 35.5 per cent in October 2022, but still above the 20.4 per cent figure recorded in October 2020.

People living in a rented home were more likely to report difficulty meeting financial needs, with nearly four in 10 reporting that was the case.

That compares with just under a quarter of those living in an owned home by a household member.

Immigrants were also more likely to report facing financial strain last month, with about four out of 10 immigrants who landed in the last year doing so.

That compares with about three in 10 more established immigrants and one in four of people born in Canada.

This report by The Canadian Press was first published Nov. 8, 2024.

The Canadian Press. All rights reserved.

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Health-care spending expected to outpace economy and reach $372 billion in 2024: CIHI

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November 6, 2024

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The Canadian Institute for Health Information says health-care spending in Canada is projected to reach a new high in 2024.

The annual report released Thursday says total health spending is expected to hit $372 billion, or $9,054 per Canadian.

CIHI’s national analysis predicts expenditures will rise by 5.7 per cent in 2024, compared to 4.5 per cent in 2023 and 1.7 per cent in 2022.

This year’s health spending is estimated to represent 12.4 per cent of Canada’s gross domestic product. Excluding two years of the pandemic, it would be the highest ratio in the country’s history.

While it’s not unusual for health expenditures to outpace economic growth, the report says this could be the case for the next several years due to Canada’s growing population and its aging demographic.

Canada’s per capita spending on health care in 2022 was among the highest in the world, but still less than countries such as the United States and Sweden.

The report notes that the Canadian dental and pharmacare plans could push health-care spending even further as more people who previously couldn’t afford these services start using them.

This report by The Canadian Press was first published Nov. 7, 2024.

Canadian Press health coverage receives support through a partnership with the Canadian Medical Association. CP is solely responsible for this content.

The Canadian Press. All rights reserved.

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Trump’s victory sparks concerns over ripple effect on Canadian economy

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3 days ago

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November 6, 2024

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As Canadians wake up to news that Donald Trump will return to the White House, the president-elect’s protectionist stance is casting a spotlight on what effect his second term will have on Canada-U.S. economic ties.

Some Canadian business leaders have expressed worry over Trump’s promise to introduce a universal 10 per cent tariff on all American imports.

A Canadian Chamber of Commerce report released last month suggested those tariffs would shrink the Canadian economy, resulting in around $30 billion per year in economic costs.

More than 77 per cent of Canadian exports go to the U.S.

Canada’s manufacturing sector faces the biggest risk should Trump push forward on imposing broad tariffs, said Canadian Manufacturers and Exporters president and CEO Dennis Darby. He said the sector is the “most trade-exposed” within Canada.

“It’s in the U.S.’s best interest, it’s in our best interest, but most importantly for consumers across North America, that we’re able to trade goods, materials, ingredients, as we have under the trade agreements,” Darby said in an interview.

“It’s a more complex or complicated outcome than it would have been with the Democrats, but we’ve had to deal with this before and we’re going to do our best to deal with it again.”

American economists have also warned Trump’s plan could cause inflation and possibly a recession, which could have ripple effects in Canada.

It’s consumers who will ultimately feel the burden of any inflationary effect caused by broad tariffs, said Darby.

“A tariff tends to raise costs, and it ultimately raises prices, so that’s something that we have to be prepared for,” he said.

“It could tilt production mandates. A tariff makes goods more expensive, but on the same token, it also will make inputs for the U.S. more expensive.”

A report last month by TD economist Marc Ercolao said research shows a full-scale implementation of Trump’s tariff plan could lead to a near-five per cent reduction in Canadian export volumes to the U.S. by early-2027, relative to current baseline forecasts.

Retaliation by Canada would also increase costs for domestic producers, and push import volumes lower in the process.

“Slowing import activity mitigates some of the negative net trade impact on total GDP enough to avoid a technical recession, but still produces a period of extended stagnation through 2025 and 2026,” Ercolao said.

Since the Canada-United States-Mexico Agreement came into effect in 2020, trade between Canada and the U.S. has surged by 46 per cent, according to the Toronto Region Board of Trade.

With that deal is up for review in 2026, Canadian Chamber of Commerce president and CEO Candace Laing said the Canadian government “must collaborate effectively with the Trump administration to preserve and strengthen our bilateral economic partnership.”

“With an impressive $3.6 billion in daily trade, Canada and the United States are each other’s closest international partners. The secure and efficient flow of goods and people across our border … remains essential for the economies of both countries,” she said in a statement.

“By resisting tariffs and trade barriers that will only raise prices and hurt consumers in both countries, Canada and the United States can strengthen resilient cross-border supply chains that enhance our shared economic security.”

This report by The Canadian Press was first published Nov. 6, 2024.

The Canadian Press. All rights reserved.

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