BREXIT

The Brexit referendum on June 23, 2016 was an unprecedented global development. The United Kingdom (UK) voting for the ‘Leave’ from the European Union (EU) is expected to have considerable socio economic and political ramifications in the years ahead.

Convergence Criteria to join European Union

The Euro is a project of a monetary union and a single currency. The Euro involves a common currency and also common monetary policy. Therefore, for membership to be successful, countries have to meet certain convergence criteria which include:

·        Inflation rate

·        Government finance

·        Exchange rate

·        Long-term interest rates

In practice many European countries were allowed to join the Euro even though they didn’t meet the strict convergence criteria. Others such as the UK, met the criteria but decided not to join.

1. Inflation rate: No more than 1.5 percentage points higher than the average of the three best performing (lowest inflation) member states of the EU.

2. Long-term interest rates: The nominal long-term interest rate must not be more than 2 percentage points higher than in the three lowest inflation member states.

3. Government finance:
i) Annual government deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.

     ii)Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.

4.Exchange rate: 

   Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for two consecutive years and should not have devalued its currency during the period.

IMPACT OF BREXIT ON BRITAIN ECONOMY

THE POUND & SHARE PRICES

The pound fell dramatically after the Brexit vote last year, and since then has been trading around 15% lower compared to the dollar and 12% lower compared to the euro than it was before the referendum.Record low interest rates have also contributed to a weaker pound.

Eventually, It has increased import costs for manufacturers which is a key factor for sectors such as the car industry, where vehicles which may be completed in the UK often have imported component parts.

The pound may have weakened but investor confidence as measured by UK share prices is holding up well - UK stock markets have risen since last summer.

The FTSE 100 has risen 16% since the eve of the referendum. FTSE 250 has also reached as high as 11%.

RETAIL SALES INDEX

Growth in the UK's service sector eased to a five-month low in February, according to a closely watched survey.

The Market/CIPS purchasing managers' index (PMI) for services fell to 53.3, down from 54.5 in January. However, it remains above the 50 threshold that separates growth from contraction.

Meanwhile, the UK's independent budget watchdog, the Office for Budget Responsibility (OBR) recently revised up its growth forecast for this year from 1.4% to 2%.However, it expects growth to then slow to 1.6% next year.

TRADE

UK exports and imports both rose in January - by £400m and £300m respectively - leaving the trade deficit in goods and services steady and unchanged from December 2016 at £2.0bn, according to ONS.

The UK has long been running a trade deficit, meaning that overall it imports more than it exports, and both imports and exports have been boosted by the weaker pound post Brexit vote.

CONSTRUCTION

House building has slowed to a six-month low as costs have soared, due largely to a weaker pound.

However, output in the construction industry overall has risen for the sixth consecutive month in February

Some firms say that rising input costs have had an effect on decision making and have led to delays in contracts being completed.

JOBS & WAGES

In the three months to January, regular pay increased by 2.3%, compared with the same period a year earlier. That was sharply lower than the 2.6% seen in the three months to December.

Wages have been growing faster than inflation in recent months, though the gap is narrowing, leading to warnings of squeezed incomes.

-Bhavya Bhatia

 final year student at JMC, Delhi University.