The era of de-globalization began in earnest with Brexit. From the moment of that 2016 vote, confusion reigned: How would the separation work, and how would an independent U.K. fare?
Now, more than a year into the separation, we’re still not sure. Trade between the U.K. and the European continent grew contentious in 2021 as border inspections proved unworkable. The loss of immigrant labor from the EU, especially lorry drivers, has slowed all parts of the economy.
Prime Minister Boris Johnson has taken the criticisms directly and has stood firm. After leading the nation through the complex negotiation of Brexit, he has remained in place to weather its foreseeable outcomes. It has not been easy; he has conceded that elevated inflation will be unavoidable in the near term. The past year has brought occasional rumors of a renegotiation of the terms of the Withdrawal Agreement, but such a dramatic move would be costly to the U.K. The recent relaxation of some of the requirements of the Northern Ireland protocol suggest an appropriate willingness to prioritize today’s commerce over yesterday’s contracts.
"Five years on, Brexit is still a major issue for the British economy."
British consumers are keeping a stiff upper lip through the turmoil. The referendum to leave the European Union was decided narrowly, as was the referendum to join a generation before. Pandemic supports like furlough payments to maintain employment have expired, and workers appear to be returning smoothly to the labor force. The Conservative Party has historically preferred austere policies, and we do not expect any generous social supports to emerge. While inflation is a risk to all markets, a slower growth pattern could lead to stagflation in Britain. If it sets in, it would be a difficult condition to cure.
The Bank of England stands ready to usher in a new policy era. Among advanced economies, it has been the central bank most eager to signal tightening. In the year ahead, we expect the cessation of asset purchases to continue in an orderly manner and rate hikes to commence. From its current level of 0.10%, we expect the overnight rate to rise to 0.50% by the end of 2022. Further hikes are conceivable, but would present a risk of overreaction.
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Technology will grow more crucial as the U.K. works to maintain its independence. The nation suffered a handful of well-publicized setbacks as factories closed and headquarters relocated in anticipation of Brexit complications. The U.K. cannot offer cost advantages but has an educated and productive workforce that can rise to meet the challenges of a new relationship with the world.
The U.K. can at least celebrate good progress against COVID-19. The country was an early adopter of vaccines and pushed for a “first doses first” strategy that prioritized initial inoculations over full vaccinations. The strategy was effective at reducing mortality. Case growth has come and gone, but the nation’s death rate has held low. The greater insularity of the U.K. will help the nation monitor its arrivals and react to any future outbreaks.
No one expected the U.K.’s transition away from the EU would be an easy change. We expect the year ahead will bring continued economic growth of just below 3% and inflation cooling back to 2.5% by the end of the year, but risks to the downside are growing.
