International Macroeconomy for Brexit and Economy - myassignmenthelp

Question: Discuss about theInternational Macroeconomyfor Brexit and UK Economy. Answer: Consequences of Brexit for the UK business cycle Brexit is the popular term for one of the biggest events in the economy of UK in recent times, i.e. Britains exit from the European Union. More than 30 million citizens of UK took part in a referendum on June 23, 2016 and 51.9% of people voted in favor of UK leaving the EU. The immediate effect on the country was that, David Cameron stepped down from his position and Theresa May became the new Prime Minister of UK (Business Insider 2017). Theresa May announced that Britain would have a hard Brexit. She has triggered the exit of Britain from EU from 29th March, 2017 (BBC News 2017). It would take two years for formal negotiations. Hard Brexit refers to giving up the complete access of the single market of EU and total access of customs union along with the European Union. The hard Brexit would give the full control over its international borders, making new deals for trade and apply its own laws on its own territories. However, it is too soon to predict an impact of Brexit on the British economy. The impact of EU referendum has provided the experts a case for studying the behavior of GDP and economic growth when it is exposed to a negative shock, obtained from political uncertainty. The immediate effect was on fall in the share market and in the value of pounds, 15% against the USD and 10% against the Euro. The economy also shrank 0.2% due to the instability in the market. In the current period, it was predicted that the economy would go down very rapidly. However, surprisingly, the economy grew 1.8% in 2016, only after 1.9% of Germany. The growth slowed down a little in 2017, but it is still expanding. Inflation stood at 2.6% but unemployment fell to 4.5%, lowest in the last 42 years (Market-inspector.co.uk 2017). Once it is implemented, the UK exports would be hit hard. EU was the biggest trade partners of UK. Once Brexit is implemented, pound might depreciate further. This would make exports cheaper and imports costlier. This would lead to more exports from UK and less import to UK. Production in the country will increase. The exchange rate would go up for UK. However, due to new trade agreements with EU, UK might have to pay more tariffs on exports. This would have a negative effect on the UK businesses. In 2015, UK exported goods of almost 133 billion to the EU, and this was half of total global exports of goods. It is predicted that, if new agreements are not made, UK might face a loss of almost 4.5 billion a year due to increased tariffs of 10%. This would also make the businesses less competitive in the market. The loss of access of the single market is estimated to bring a loss of almost 75 billion. The unemployment is also estimated to increase to 6.5% once UK finally leaves the EU, a s the migration laws would change (Allen and Scruton 2017). Cyclical fluctuations in the economy refer to the alternate periods of expansion and contraction of the economy, lasting up to 18 months or longer from peak to the trough of the economic cycle. During expansion, the aggregate demand increases and falls during contraction. The businesses react to contraction by cutting the costs, employment, and delaying investments. Drivers of cyclical fluctuations are attributed to level of aggregate demand, level of labor supply, exports and imports, and demand and supply side shocks (Miles, Scott and Breedon 2012). UK has been going through economic contraction for the past few years. Till Brexit, UK was following the rules of customs union, trade rules with EU and had access to the single market. There was mobility of labor across the countries. Brexit would hamper those. Britain would have to enter into new trade agreements with EU as well as with rest of the world as an independent nation. The aggregate demand for the British goods is expected to rise in the global market. The migration laws would be changed and people would lose the free movement among the countries. This would affect the labor supplies in UK and EU. Hence, employment would be affected. The Brexit issue has made the pound volatile. The currency fell just after the referendum, recovered after that, and fell again for the fear of hard Brexit. When the currency is depreciated, the exports would become cheaper, thus, aggregate demand for goods would increase in the global market. This would lead to a rise in domestic production, increasing efficiency of the domestic producers. Employment in the economy would increase initially. With more products available in the domestic market, the inflation would fall. Thus, the economy would expand. The weaker pound would increase the import cost. The price for raw materials and energy increases after Brexit referendum due to inflation, and this would make products costlier within the country also. Although the exports are expected to rise, the fall in imports are higher and the trade deficit is expected to increase initially unless the economy becomes stable (Business Insider 2017). Feedback effects refer to the procedure when the output of a system is used as an input of the other, in the form of cyclical loop of cause and effect. For Brexit, it can be said that, there is feedback effect in the economy. The economy is expected to grow as an independent nation in the world market. On one hand, the citizens are rejoicing this fact of taking its own decisions as per the trade rules of WTO. This is definitely a positive factor for the economy as this would boost the domestic production. On the other hand, the uncertainties of the system and new rules, lack of flexibility in labor migration, and increased tariff, the business and the economy would be hit hard. Policies need to be made for new trade agreements and to make the pound stable. Monetary policies need to be formulated to make the interest rate, inflation rate and exchange rate stable. UK should appreciate the currency so that exchange rate improves. The interest rate should be increased to lower the investment demand and thus, the spending would be reduced, level of money would be less in the economy and aggregate demand would fall. The level of inflation would go down in the economy. Impact of Brexit on the prospects for the UK public debt There are effects of Brexit on the public debt of UK. However, the precise impacts are still too early to decide. There are two effects on the public debt of EU, namely mechanical and national income effect. Leaving EU would lead to strengthening of the public finances as the net contribution would fall. Furthermore, a rise in national income would improve the public finances of UK after it leaves EU. UK had to contribute a certain amount to the annual budget of EU. In 2013 and 2014, UK contributed 1% of the GDP, almost 18 billion and 13 billion in 2015. Net contribution amounted to almost 8.5 billion per year. After Brexit, UK do not need to contribute this amount to the EUs budget, and thus, this huge money would be saved. This would improve the public debt in the medium run. This amount of money could be used for developmental purposes in the country. The level of public debt would be reduced too. The contractionary fiscal policies of UK should be implemented, so that, the government does not need to borrow much from the public. It helps in economic growth in the short and medium run. Rising public debt ratio leads to slower economic growth. When the contribution to the EU stops, it is expected that the public debt ratio would improve in the country, influencing faster economic growth. The impact of Brexit in the long run could be on the population along with economic growth. The issue of immigration has been a topic of debate in UK even before Brexit happened. The UKs Office for National Statistics showed that approximately 2.15 million workers from EU are currently working in UK. It showed that 257000 people came from EU by September 2015, and 273000 people came to UK from outside EU. As it is a prospective market, people from many countries of EU have been migrating to UK for a long time. Thus, the skilled EU workers were getting jobs in UK, while the citizens were getting deprived. This is a big problem in the country. With Brexit in effect, the migration and labor laws would be changed to generate employment for the citizens. As Britain now has more control over its borders, the immigration would be reduced through legislations. Thus, this has a long run effect on the economy, culture and society of UK (Financial Times 2016). This also implies that more money would be staying in the country if employment of UK citizens increase and that for the migrated workers decrease. This is a national income effect on the public debt. As the level of national income would rise in the country, the level of public debt would fall in the long run. References Allen, K. and Scruton, P., 2017.How has the Brexit vote affected the UK economy? January verdict. [online] the Guardian. Available at: https://www.theguardian.com/business/ng-interactive/2017/jan/25/how-has-the-brexit-vote-affected-the-uk-economy-january-verdict [Accessed 26 Aug. 2017]. BBC News, 2017.Brexit: All you need to know about the UK leaving the EU. [online] BBC News. Available at: https://www.bbc.com/news/uk-politics-32810887 [Accessed 26 Aug. 2017]. Business Insider, 2017.The economic damage from Brexit has been fast and widespread. [online] Business Insider. Available at: https://www.businessinsider.in/The-economic-damage-from-Brexit-has-been-fast-and-widespread/articleshow/53636304.cms [Accessed 26 Aug. 2017]. Financial Times, 2016.Brexit and immigration the vital questions. [online] Ft.com. Available at: https://www.ft.com/content/e1f6c0ee-1c41-11e6-a7bc-ee846770ec15 [Accessed 26 Aug. 2017]. Market-inspector.co.uk, 2017.Impact of Brexit on Businesses in the UK. [online] Market-inspector.co.uk. Available at: https://www.market-inspector.co.uk/blog/2016/10/impact-of-brexit-on-businesses-in-the-uk [Accessed 26 Aug. 2017]. Miles, D., Scott, A. and Breedon, F., 2012.Macroeconomics: Understanding the global economy. John Wiley Sons.