May and Hammond's Two Year Window

May and Hammond's Two Year Window

The problem

At this juncture, after the fallout from the G20 summit in China, the Chancellor, Phillip Hammond and his boss Theresa May, could be feeling somewhat overwhelmed in as what to do with the ‘Brexit problem.’ Japan and China seem to be heaping the pressure on the UK to start negotiations soon. Which anyone outside the UK would of course want given the fact no one seems to have a clue what is going on.

In fact, this indecision could be a real issue for Britain. Japan’s foreign ministry is claiming that Japanese firms could leave the UK in search of a new EU nation in which to build their factories. In doing so 140,000 jobs are at risk in the UK. President Obama also seems to be suggesting that ‘stressed that the US would prioritise trade talks with the Asia-Pacific region and the EU.’ Both of which do seem clear risks to the UK economy.

In return, Mrs. May seems to giving rather vague statements out that the ‘UK is open for business’, and it will remain a world leader in terms of trade. But already larger banks are starting to think that London will not be the trade hub it is now, and this could easily move to Frankfurt. Not good considering the city is one of the most lucrative areas in the world in terms of business.

 

 A solution?

That said, the one thing May and Hammond have in their armory is that Britain has not yet left the EU. The stock market has recovered from its well documented fall on June 23rd and retail spending has remained solid. Mark Carnery’s use of quantative easing has offset any real damage. Whilst there seem to be about a billion forecasts of what may or may not happen, Britain is still part of the EU. Which means the PM and chancellor can prepare for when Britain does eventually leave the EU…

One article in the Economist did seem to give a real suggestion. Focus on the internal economy first and address the external after. By attending to smaller projects such as building infrastructure, reversal of benefit cuts could in turn help those who would feel the backlash of Brexit the most. High subsidies for foreign firms could also mean that these firms do in fact stay within Britain. Use of Keynesian regional policy would win back those voters who felt disenchanted with the current government. Big shiny projects like HS2 will help, but the massive cost in a time of uncertainty may be the main issue.

Overall May and Hammond must use their two year window that Britain has to leave the EU to rebuild the internal economy first. Germany may reject everything Britain puts forward in the negotiations, but a safety net at home will certainly help in years to come.  


References 

The Economist -  The Right Kind of Budget 
http://www.economist.com/news/leaders/21706268-do-list-britains-new-chancellor-philip-hammond-right-kind-budget
The Economist - Fact and Fiction
 http://www.economist.com/news/britain/21706348-dire-prophecies-doom-have-not-come-trueyet-economy-slowing-fact-and-fiction

BBC news - Brexit: Japan warns firms may move European HQ out of Britain http://www.bbc.co.uk/news/business-37270372

Guardian - Theresa May to tell G20 UK is ‘open for business’ despite Brexit vote

http://www.theguardian.com/politics/2016/sep/03/theresa-may-g20-uk-brexit-china-hinkley-point-c

BBC - Brexit: EU's growing impatience over UK's lack of clarity

http://www.bbc.co.uk/news/uk-politics-37270599