Markets

Brexit and tariffs only serve to cause economic harm

On Tuesday the International Monetary Fund (IMF) upgraded its economic growth forecast for both the world and the UK economy this year.

The IMF now believes Britains economy will grow by 1.6 per cent this year and the world economy by 3.9 per cent.

This should have been cause for some celebration in the UK in the light of Brexit.

Except it wasnt. The IMF also downgraded economic growth forecasts for the UK for the next few years, and said very clearly that Brexit was holding the UK economy back.

It also sounded alarm bells over the prospect of a global trade war, warning global trade could be “torn apart” if the US and China fail to resolve their differences.

Part of the reason for the upgrade in the global economic forecast is that investment levels are increasing thanks to pent up demand left over from the aftermath of the financial crisis, the IMF said.

Lack of investment

But with Britain, the opposite is the case with investment delayed because of Brexit, which the IMF said was having a direct, and negative, impact on economic growth.

So where does that leave businesses and the markets? As usual, they are at the mercy of politicians and political decisions. The UK economy and its progress will depend on the success or failure of the government to negotiate Brexit.

Given the House of Lords now looks likely to get an amendment through parliament that could force the government to remain in the Customs Union those negotiations could now take quite a bit longer than hoped. The government is likely to try to overturn the amendment, but even so it will mean it have to focus time and effort to win a parliamentary battle rather than on Brexit negotiations.

So, any progress for the UK economy is likely to be delayed further until local political arguments can be resolved. If they arent resolved quickly, it is likely the IMF will downgrade the UKs growth forecast for next year further still.

Meanwhile, the US and China, the worlds two largest economies, are facing off over trade with little sign of a resolution in sight. The IMFs warning was that the first shots in a trade war had been fired and that tensions could escalate.

What most businesses and markets in general want now is a little bit of stability. It is almost certain that businesses will be reviewing investment decisions not just because of Brexit but also because of the potential of an international trade war.

Both tariffs in the US and Brexit in the UK hark back to a time when both the US and UK were the dominant powers in the world. Both are reactions to global free trade and its impact. And as the IMF has rightly noted, neither is a solution.

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