The Frictional Costs Of Trading Post-Brexit Are Becoming More Apparent

This week the impacts of Brexit have been coming into focus. While the political benefits of leaving were reinforced last week by the incompetence of the European Commission and its bungled vaccine program, the economic cost of leaving the single market is also becoming more apparent. What many industries are coming to realise is that doing business with Europe is needlessly complicated and bureaucratic. This has always been the case, to the extent it prompted the creation of the world’s largest free trade area to make life easier for its members.

While some of this pain will fade over time, some of it is also there by design. The government is deliberately promoting the regulatory divergence that is complicating trade with the continent. It will need to come up with a good reason why pretty soon or people will start to question the point. Europe has a lot of customers with a lot of money that will attract British businesses like moths to a flame. Without providing alternative markets the desire to reduce barriers with the markets we already have will only increase.

 

UK: GDP WAS POSITIVE IN Q4 AS UK HOLDS OFF DOUBLE-DIP RECESSION

UK Flag thumbnail blogOngoing recovery in construction and manufacturing helped the economy to grow in the final quarter of 2020. Although GDP growth for Q4 was better than expected, increasing by 1 per cent over the previous three months, overall the economy shrank by 9.9 per cent in 2020 – the biggest decrease in annual output in 300 years. The UK has fared poorly in comparison to other major economies, as US GDP contracted by 2 per cent and EU GDP fell 6.4 per cent over the same period.

The new data covers the period before the latest lockdown and it is widely expected that GDP will contract sharply in the first quarter of 2021. With the vaccination programme currently on target and infection rates continuing to fall across the country any easing of lockdown restrictions should see a sharp rebound in economic activity and should prevent the UK experiencing a double-dip recession.

 

US: INFLATION REMAINS WEAK BUT BOND MARKETS EXPECT IT TO RETURN

US Flag Blog ThumbnailInflation in the US has continued to come in short of expectations. Excluding food and energy costs, consumer inflation in January was unchanged compared to the previous month. Overall, inflation was 1.4 per cent over the last 12 months. The US Federal Reserve has a target for consumer inflation of 2 per cent and recently changed its inflation policy to allow inflation to overshoot for a limited time to adjust for inflation persistently falling short of target in recent years.

US Fed chairman Jay Powell this week restated this position, saying the central bank would be ‘patiently accommodative’ by continuing to provide financial support to the economy and tolerating higher inflation in the short-term to help boost employment. Bond markets have been taking note and the yield curve for US government bonds has been steepening (investors are demanding higher yields for longer-dated bonds due to the risk of higher inflation in future). This week the yield on 30-year Treasury bonds moved above 2 per cent for the first time since the Covid-19 outbreak.

 

ALTERNATIVES: IS BITCOIN GOING MAINSTREAM?

Another week and another spike in the price of Bitcoin. It increased 10 per cent at the start of the week as car maker Tesla announced it had purchased $1.5bn of Bitcoin and is considering accepting it as payment. Tesla CEO Elon Musk has been drumming up interest in Bitcoin and other cryptocurrencies for a while, but it is the potential for Bitcoin to be used as payment which is most significant. Cryptocurrencies currently don’t function as currencies at all, mainly because they aren’t recognised as legal tender, are too volatile to be used as a system of account and you generally can’t spend them anywhere. If Tesla does allow Bitcoin payments, it’s a step towards addressing the problem.

With less fanfare, this week Mastercard announced it would begin moving cryptocurrencies across its network soon, while BNY Mellon said it will provide custody services for digital assets by the end of the year. Cryptocurrencies may be starting to mature but with no real use and no yield, they are perhaps best compared to gold as a hedge for those who fear the very worst.

 

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Photo by Pierre Borthiry on Unsplash

 

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