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Brexit's challenge can be met if our politicians are positive

By Angela McGowan

Published 02/08/2016

Manufacturers might have to buy components at a higher price due to the weak sterling
Manufacturers might have to buy components at a higher price due to the weak sterling

Little over a month into this new post-referendum era, there have been changes to the economic climate, some glaringly obvious and others much more subtle.

For both business and consumers, the biggest impact so far has clearly been the depreciation of the pound.

Sterling's weakness has been a double-edged sword for the business community. Some large companies such as Diageo and British American Tobacco have reported that they are benefiting from the competitive gains they now have when selling into foreign markets.

There will be smaller companies in Northern Ireland saying a similar thing.

For some manufacturers, though, weak sterling can also mean that the cost of buying components and inputs for the production line has dramatically risen, and there are fears that these price rises will have to be pushed on to customers.

For example, Ford has warned that Brexit and the weak pound is only adding to the other pressures it is facing from market factors in China and the US. Ford is now expecting a £1bn hit to its business over the next two years and has therefore warned about both price rises for consumers and, unfortunately, plant closures in the UK.

Weak sterling will of course raise prices for consumers, but that inflationary effect is unlikely to be observed by households immediately (unless of course they have holidayed abroad this summer and then they will have seen that the pound in their pocket did not go so far). Inflation will undoubtedly rise from its current low position of only 0.5% and there are expectations it could easily overshoot the 2% target in late 2017.

Households with mortgages will, however, will be glad to hear that despite the higher inflationary outlook, the Bank of England is unlikely to risk raising interest rates, given the heightened uncertainty and expected slowdown in economic growth. It is highly probable that interest rates will stay low for much longer.

Investment is the life blood of any economy and it too has been impacted by UK's referendum decision, although the extent of that impact is still hard to gauge. At Danske Bank we have not seen any knee-jerk reactions from our business customers, although admittedly there is definitely an air of caution in the business community because the elusive 'Plan B' for the UK economy outside Europe is still nowhere to be found.

The Bank of England's Business Conditions Survey, published in July, showed that the majority of businesses (66%) did not see the referendum impacting investment or hiring plans in the short term, while one third of businesses surveyed thought there would be a negative impact over the next 12 months. Purchasing managers indices, which are closely correlated with economic growth, dipped substantially during July for the services and manufacturing sectors, suggesting a contraction in the economy for quarter three.

But we have to keep in mind that when those surveys were carried out there was tremendous political uncertainty in the UK.

We can now take comfort from the fact that the political situation in London has settled substantially, with a new government formed and a new Prime Minister in post.

Theresa May is widely considered to be a safe pair of hands and her measured approach is a welcome relief from the populist and divisive politics that the public and the business community had to endure in the run-up to June 23.

One of the biggest questions now will be how long it takes for households to get their confidence back on track. Consumers have driven the UK's recovery in the last few years, so any loss of confidence has obvious implications for domestic demand. The UK consumer confidence barometer carried out by GfK showed a substantial knock to consumer confidence during July and the ONS retail trade statistics also pointed to a slowdown in monthly sales.

Confidence is influenced by a number of factors, such as the labour market, house prices and the general stability in the wider economy.

House prices in London and the South East will most probably take the biggest hit from Brexit, but it should be remembered that the market in the UK is very different to the local one, where houses are not over-valued.

In the months ahead it will be the government's ability to steer the UK economy through uncharted waters that will influence confidence levels for both business and consumers. Innovation is often a great master in terms of finding solutions and we have to remember that the government possesses economic levers such as monetary policy and fiscal policy that can be used to reduce the impact of a slowing economy. I am quite confident that Mrs May will not be shy in that regard.

Closer to home, positive politics at the Executive level are essential if Northern Ireland is to emerge from this economic and political shock. After 20 years of peace on this island and continuous improvements in Anglo-Irish relations, people expect that to continue. The current Executive will never be forgiven if they use Brexit as an excuse to polarise the country and allow our economy to slide uncontrollably backwards.

Every single person in Northern Ireland deserves to live in peace, to access work and enjoy good public services.

We have built an international reputation for making progress, for working together and for finding a mutual way forward that is acceptable to everyone. Brexit may pose a challenge, but it can only be overcome if our politicians collaborate and compromise.

In next week's Economy Watch, we hear from PwC NI chief economist Dr Esmond Birnie

Belfast Telegraph

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