Brexit – the story unfolds: 3 months on
It has been over three months since the UK voted to leave the European Union, and, according to the Bank of England, the economy is doing better than expected.
However, the historic referendum has sent shock waves through the economic and political spheres, and will undoubtedly continue to have an impact. It’s important to remember that, politically, nothing has actually “happened” yet. Article 50 is not expected to be enacted until late March, so true economic impact is yet to be fully understood. However, on an individual level we are seeing a 1% rise in cost of living, a rise in petrol prices and a big change in the cost of holiday money. The economic arguments for and against Brexit were quite confusing for the average voter, and even now the uncertainty can be difficult to untangle. The value of the pound has quickly dropped to the lowest level in 30 years, yes, but unless you’re going on holiday, why does that really matter? How will it affect you and your personal finances?
Effect on interest rates
The Bank of England has soothed uncertainty by cutting interest rates to an all-time low of 0.25%. This is great news if you’re a borrower, or have mortgage repayments to keep up with, but the economic uncertainty may make banks keen to keep strong capital reserves – in other words, they may be more reluctant to lend, as we saw in 2008. For savers out there or those who are keeping a close eye on their pension funds, it is undoubtedly frustrating, particularly when it is remembered that, if it had not been for the Brexit vote, the Bank of England suggests that rates would have risen.
Tesco vs Unilever
However, recent news has highlighted a more visible impact on our day to day spending. A row broke out between Tesco and Unilever, with some of the country’s most beloved brands, including Marmite and PG Tips, disappearing from Tesco shelves for a short period of time.
The fall in the pound against the euro and the dollar, which thus far has been controversial enough, has triggered a price-hike across Unilever brands of 10%. Though some brands, such as Marmite, are produced wholly in the UK, many are sourced overseas, such as PG Tips, and have been impacted by the higher cost of importing.
As Unilever reports its sales figures in euros, even brands that have not had rising production costs are contributing less to overall sales proceeds than they were before. Quite simply, they’re just not worth as much to the company anymore. This is the clearest example of the result of devaluation – Britain’s exports are worth less, and imports cost more. Tesco were not happy with the price hike, and, for a time, refused to stock the brands as they continue their price war with competitors such as Aldi and Lidl. This is not the first time prices have been raised as a direct result of Brexit; Apple, Dell and Peugeot have all increased the RRP of their products in response to the referendum. The Tesco incident, however, is the first time it has so drastically and so clearly affected the everyday life of ordinary members of the public. Suddenly, food inflation is a very real prospect: The Bank of England expects that the average grocery shop for Brits will cost 5% more, while The Economist suggests that by next year, the inflation rate will be at around 2 or 3%.
In simple terms, all this means people are set to have less disposable income. Though there is no need to panic about falling wages, if wage growth doesn’t rise more quickly (it’s currently at 2.1%), it is unlikely they will make up the difference.
It remains to be seen how comfortable banks will be about lending, but the reality is that many households will be going over their budgets in the coming months. For those that already have loans or mortgages, the low interest rate set by the Bank of England may help. However, for those who were looking to take out large loans in the near future, prospects maybe slightly narrowed. It is important to remember that government schemes, such as the Help to Buy ISA, are still available as well. Inflation rates of 3% is not at the same levels of the 2011 financial crisis, which saw inflation of 5%. The economy may well be slowing, but it is not necessarily heading towards a recession.
For now, economic growth is continuing, just at a slower rate than before. Marmite is still available in other shops. Keep calm, and carry on.
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