Evelyn Reynolds

The U.K. economy is worse off today than before Brexit, according to new analysis from Goldman Sachs.
Britain’s decision to leave the European Union has hampered the economy to the tune of 5% versus other comparable countries, the estimates showed.
The Wall Street bank attributed the shortfall to three key factors: reduced trade; weaker business investment; and lower immigration from the EU.

Pro-EU demonstrators protest outside Parliament against Brexit on the fourth anniversary of Britain’s official departure from the European Union in London, United Kingdom on January 31, 2024.
Future Publishing | Getty Images

LONDON — Post-Brexit Britain has “significantly underperformed” other advanced economies since the 2016 EU referendum, according to new analysis from Goldman Sachs, which aims to quantify the economic cost of the Leave vote.
In a note last week entitled “The Structural and Cyclical Costs of Brexit,” the Wall Street bank estimates that the U.K. economy grew 5% less over the past eight years than other comparable countries.

The true hit to the British economy could be anywhere from 4% to 8% of real gross domestic product (GDP), however, the bank said, acknowledging the difficulties of extracting the impact of Brexit from other simultaneous economic events including the Covid-19 pandemic and the 2022 energy crisis. Real GDP is a growth metric that has been adjusted for inflation.
Goldman Sachs attributed the economic shortfall to three key factors: reduced trade; weaker business investment; and labor shortages as a result of lower immigration from the EU.
A Treasury spokesperson told CNBC that the government was “making the most of Brexit freedoms to grow the economy,” including repealing EU financial services law, which it said could unlock a potential £100 billion in investment over the next decade.

Trade and investment down

The U.K. voted 52% to 48% to leave the EU on June 23, 2016, but officially exited the union on Jan. 31, 2020.
Over that period until today, U.K. goods trade has underperformed other advanced economies by around 15% since the Leave vote, according to the bank’s estimates, while business investment has fallen “notably short” of pre-referendum levels.

Meantime, immigration from the EU has fallen — a key pledge of the Vote Leave campaign — only to be replaced by a less economically active cohort of non-EU migrants, primarily students, the research said.

“Taken together, the evidence points to a significant long-run output cost of Brexit,” the report’s authors said.
The bank noted the reduction in trade was in line with expectations and the underperformance in investment was “more pronounced” that anticipated. However, it said the shifts in immigration patterns posed the most important cyclical repercussions for the U.K. economy — and inflation in particular.
“The post-Brexit change in immigration flows has reduced the elasticity of labor supply in the U.K., contributing to the post-pandemic surge in inflation and pointing to more cyclical labor market and inflation pressures going forward,” the report said.
U.K. real GDP per capita has barely risen above pre-Covid levels and currently stands 4% above the mid-2016 level, it said. That compares to 8% for the euro zone area and 15% for the U.S.
Meantime, the U.K. has recorded higher inflation over the period, with U.K. consumer prices rising 31% since mid-2016 compared with 27% in the U.S. and 24% in the euro zone, it added.
While the report noted that new non-EU trade agreements could potentially mitigate the costs of Brexit, estimates suggest that the benefit is likely to be small.
The British government estimates that its free trade agreement with Australia will boost U.K. GDP by 0.08% per year, while the economic impact of a new trade deal with Switzerland is unclear.
Meantime, the timelines for prospective new trade deals with major partners such as the U.S. and India have not yet been announced. More

The consumer price index increased 0.3% in January, the Bureau of Labor Statistics reported. On a 12-month basis, that came out to 3.1%, down from 3.4% in December.
Shelter prices accounted for much of the rise, climbing 0.6% on the month, contributing more than two-thirds of the headline increase. On a 12-month basis, shelter rose 6%.
Stocks slid sharply following the release and Treasury yields surged higher.

Inflation rose more than expected in January as stubbornly high shelter prices weighed on consumers, the Labor Department reported Tuesday.
The consumer price index, a broad-based measure of the prices shoppers face for goods and services across the economy, increased 0.3% for the month, the Bureau of Labor Statistics reported. On a 12-month basis, that came out to 3.1%, down from 3.4% in December.

Economists surveyed by Dow Jones had been looking for a monthly increase of 0.2% and an annual gain of 2.9%.
Excluding volatile food and energy prices, the so-called core CPI accelerated 0.4% in January and was up 3.9% from a year ago, unchanged from December. The forecast had been for 0.3% and 3.7%, respectively.

Shelter prices, which comprise about one-third of the CPI weighting, accounted for much of the rise. The index for that category climbed 0.6% on the month, contributing more than two-thirds of the headline increase, the BLS said. On a 12-month basis, shelter rose 6%.
Food prices moved higher as well, up 0.4% on the month. Energy helped offset some of the increase, down 0.9% due largely to a 3.3% slide in gasoline prices.
Stock market futures fell sharply following the release. Futures tied to the Dow Jones Industrial Average were off more than 250 points and Treasury yields surged higher.

Even with the rise in prices, inflation-adjusted hourly earnings increased 0.3% for the month. However, adjusted for the decline in the average workweek, real weekly earnings fell 0.3%. Real average hourly earnings rose 1.4% from a year ago.
“Inflation is generally moving in the right direction,” said Lisa Sturtevant, chief economist at Bright MLS. “But it’s important to remember that a lower inflation rate does not mean that prices of most things are falling — rather, it simply means that prices are rising more slowly. Consumers are still feeling the pinch of higher prices for the things they buy most often.”
The release comes as Federal Reserve officials look to set the proper balance for monetary policy in 2024. Though financial markets have been looking for aggressive interest rate cuts, policymakers have been more cautious in their public statements, focusing on the need to let the data be their guide rather than preset expectations.
Fed officials expect inflation to recede back to their 2% annual target in large part because they think shelter prices will decelerate through the year. January’s increase could be problematic for a central bank looking to take its foot off the brake for monetary policy at its tightest in more than two decades.
“The much-anticipated CPI report is a disappointment for those who expected inflation to edge lower allowing the Fed to begin easing rates sooner rather than later,” said Quincy Krosby, chief global strategist at LPL Financial. “Across the board numbers were hotter than expected making certain that the Fed will need more data before initiating a rate cutting cycle.”
Generally, the inflation data had been encouraging, even if annual rates remain well above the Fed’s 2% target. Moreover, core inflation, which officials believe is a better guide of long-run trends, has been even more stubborn as housing costs have held higher than anticipated.
In recent days, policymakers including Chair Jerome Powell have said the broader strength of the U.S. economy gives the Fed more time to process data as it doesn’t have to worry about high rates crushing growth.
Market pricing before the CPI release indicated a tilt toward the first rate cut coming in May, with a likely total of five quarter-percentage point moves lower before the end of 2024, according to CME Group data. However, several Fed officials have said they think two or three cuts are more likely.
Outside of the jump in shelter costs, the rest of the inflation picture was a mixed bag.
Used vehicle prices declined 3.4%, apparel costs fell 0.7% and medical commodities declined 0.6%. Electricity costs rose 1.2% and airline fares increased 1.4%. At the grocery store, ham prices fell 3.1% and eggs jumped 3.4%.
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Investors are closely watching China, whose stock market gyrations, deflation problem and property woes are casting a shadow over global growth outlook.
According to the IMF, demand for new housing in China is set to drop by around 50% over the next decade.
“Every big industrial transition has had a major depression associated with it, or global financial crisis,” Bill Winters told CNBC.

DUBAI, United Arab Emirates — China is facing a confidence deficit as its economy undergoes massive transition and concern grows over its ongoing property crisis, a top banking CEO said while onstage at Dubai’s World Governments Summit.
“China’s biggest problem to me is a lack of confidence. External investors lack confidence in China and domestic savers lack confidence,” Bill Winters, CEO of emerging markets-focused bank Standard Chartered, told CNBC’s Dan Murphy Monday during a panel discussion.

“But I think China is going through a major transition from old economy to new economy,” Winters added. “If you visit the new economy, which many of you have — I have — it’s booming, absolutely booming, well into double-digit growth rates and in everything EV-related, the whole supply chain, everything sustainable finance and sustainability related, etc.”
Investors are closely watching China, whose stock market gyrations, deflation problem and property woes are casting a shadow over the global growth outlook. According to an International Monetary Fund report completed in late December 2023, demand for new housing in China is set to drop by around 50% over the next decade.
Decreased demand for new housing will make it harder to absorb excess inventory, “prolonging the adjustment into the medium term and weighing on growth,” the report said. Property and related industries account for about 25% of China’s gross domestic product.

IMF Managing Director Kristalina Georgieva, speaking to CNBC in Dubai on Sunday, stressed what she saw as the need for reforms from Beijing in order to stem its economic challenges.
The international lender has discussed with China “longer-term structural issues that the country needs to address,” Georgieva said. “Our analysis shows that without deep structural reforms, growth in China can fall below 4%. And that will be very difficult for the country.”

“We want to see the economy genuinely moving more towards domestic consumption, and less reliance on exports … but for that, [they need] confidence of the consumer,” she said, echoing Winters’ sentiments on domestic confidence. “And that means fix the real estate, get the pension system in place, as well as these longer-term improvements in the fundamentals of the Chinese economy, would be necessary.”
Standard Charters’ Winters, meanwhile, is ultimately optimistic about the world’s second-largest economy, pointing out that every society that’s undergone major economic transition inevitably experiences some level of tumult and growing pains.
“They’re trying to manage this transition without disrupting the financial system, which in the West, we’ve never managed to do,” the CEO said. “Every big industrial transition has had a major depression associated with it, or global financial crisis. They’re trying to avoid that which means it gets dragged out. I think they’ll get through the back end just fine.”
— CNBC’s Evelyn Cheng contributed to this report. More

In late January, the International Monetary Fund more than doubled its forecast for the pace of Russia’s economic growth this year, raising it from 1.1% in October to 2.6%.
Russian defense spending has skyrocketed since the war began.
Russia’s current production and consumption patterns are “pretty much what the Soviet Union used to look like,” Georgieva said.

Kristalina Georgieva, managing director of the International Monetary Fund, at a press conference at the IMF Headquarters on April 14, 2023.
Kevin Dietsch | Getty Images News | Getty Images

The head of the International Monetary Fund warned the Russian economy is still facing significant headwinds despite receiving a recent growth upgrade by the Washington-based institution.
Russia’s economy has proven to be surprisingly resilient amid waves of Western sanctions in the nearly two years since it launched its full-scale invasion of Ukraine.

In late January, the International Monetary Fund more than doubled its forecast for the pace of the country’s economic growth this year, raising it from 1.1% in October to 2.6%.
Despite this, IMF Managing Director Kristalina Georgieva sees more trouble ahead for the country of roughly 145 million.
Speaking to CNBC’s Dan Murphy at the World Governments Summit in Dubai, Georgieva described what she believed was fueling Russia’s growth and why the forecast figure does not tell the full story.
“What it tells us is that this is a war economy in which the state — which let’s remember, had a very sizeable buffer, built over many years of fiscal discipline — is investing in this war economy. If you look at Russia, today, production goes up, [for the] military, [and] consumption goes down. And that is pretty much what the Soviet Union used to look like. High level of production, low level of consumption.”
Russian defense spending has skyrocketed since the war began. Last November, Russian President Vladimir Putin approved a state budget that increased military spending to roughly 30% of fiscal expenditure, amounting to a nearly 70% rise from 2023 to 2024.

Defense and security spending is expected to comprise some 40% of Russia’s total budget spending this year, according to analysis by Reuters.

At the same time, however, more than 800,000 people have left Russia, according to estimates by exiled academics compiled last October. Many among those who fled are highly skilled workers in fields like IT and sciences.
“I actually think that the Russian economy is in for very tough times because of the outflow of people, and because of the reduced access to technology that comes with the sanctions,” Georgieva said.
“So although this number looks like a good number, there is a bigger story behind that, and it’s not a very good story.” More

Germany’s economy has been struggling and the latest data has provided little hope for improvement.
Economists say the worst may soon be over, but are still not hopeful about economic growth in 2024 and suggest the country may enter a technical recession this year.
Headwinds include a slowdown of global trade, higher energy prices, and national and international political uncertainty.

Federal Chancellor Olaf Scholz (SPD, r-l), Robert Habeck (Alliance 90/The Greens), Federal Minister for Economic Affairs and Climate Protection, and Christian Lindner (FDP), Federal Minister of Finance, follow the debate at the start of the budget week.
Michael Kappeler | Picture Alliance | Getty Images

Good news has been sparse for the German economy. And the latest economic data has not done much to change this.
A few key 2023 data points, namely factory orders, exports and industrial production, were out last week and indicated a weak end to the year that saw questions about Germany being the “sick man of Europe” resurface.

“The data confirm that German industry is still in recession,” Holger Schmieding, chief economist at Berenberg Bank, told CNBC.
Industrial production declined by 1.6% in December on a monthly basis, and was down 1.5% in 2023 overall compared to the previous year. Exports – which are a major cornerstone of the German economy – fell by 4.6% in December and 1.4%, or 1.562 trillion euros ($1.68 trillion), across the year.
Meanwhile, factory orders data seemed promising at first glance as it reflected an 8.9% increase in December compared to November.
But this growth “is not much reason for comfort,” Franziska Palmas, senior Europe economist at Capital Economics told CNBC, explaining that it is thanks to several large-scale orders, which tend to be volatile. “Orders excluding large-scale orders actually fell to a post-pandemic low,” she added.
For 2023 overall in comparison to the previous year, factory orders were down 5.9%.

While this “hard” data from December does not yet suggest recovery is in sight, the most recent Purchasing Managers’ Index report indicates that the worst may be over soon in the manufacturing sector, Schmieding said.

“Although at 45.5 still below the 50 line that divides growth from contraction, it edged up to an 11-month high,” he noted.
Even so, economic growth is unlikely to be imminent, Erik-Jan van Harn, a macro strategist for global economics and markets at Rabobank, told CNBC.
“We are still nowhere near the kind of activity in the German industry that we saw pre-pandemic,” he explained. “We still expect a modest contraction in Q1, but it’s likely to be less severe than 23Q4,” van Harn said. He is then anticipating growth to pick up slightly, but sees full-year growth as being flat.
Others are even more pessimistic about the German economy.
“We stick to our forecast that the German economy will shrink by 0.3% in 2024 as a whole,” Commerzbank Chief Economist Jörg Krämer told CNBC.
This would be broadly in line with how Germany’s economy fared in 2023, when it contracted by 0.3% year-on-year, according to data released by the federal statistics office last month. The data also showed a 0.3% decline of the gross domestic product in the fourth quarter, but Germany still managed to avoid a technical recession, which is characterized by two consecutive quarters of negative growth.
This is due to the statistics office finding that the third quarter of 2023 saw stagnation rather than contraction. But should the economy contract as expected in the first three months of 2024, Germany would indeed fall into a recession.
“Companies simply have too much to digest — global rate hikes, high energy prices, less tailwind from China and an erosion of Germany as a business location,” Krämer explained, addressing reasons for the downturn.
Some of these headwinds may also play a key role when it comes to weakening export figures, Rabobank’s van Harn pointed out. Factors like cheap energy from Russia, strong demand from China and surging global trade buoyed Germany’s exports for decades, “but are now faltering,” he said.
Looking beyond the purely economical, national and international politics could also be a risk for the country’s economy, the experts say.

Germany’s coalition government has been under pressure after going through a budget crisis following a decision from the constitutional court that the re-allocation of unused debt taken on during the pandemic to current budget plans is unlawful.
This left a 60-billion-euro hole in the coalition’s budget plans, and as the funds were allocated for years to come, the crisis is likely to rear its head again at the end of the year when 2025 budget planning begins.
Voter satisfaction with the government is also low, with the opposition CDU party currently leading in the polls and being followed in second place by Germany’s far-right party, the AfD. Support for the latter has however declined in recent weeks amid protests against the far-right sweeping the country, with hundreds of thousands of Germans taking to the streets.
Elsewhere, the U.S. election could make things more difficult as well, Schmieding suggested.
“Trade war threats by Trump could be a significant negative for Germany,” he said – however this of course depends on the outcome of the election, and may not unfold in full force until 2025, he noted. More

People shop in a supermarket in the Manhattan borough of New York city on January 27, 2024.
Charly Triballeau | AFP | Getty Images

The prices consumers pay in the marketplace rose at an even slower pace than originally reported, according to closely watched revisions the government released Friday.
Updates to the consumer price index showed that the broad basket of goods and services measured increased 0.2% on the month, less than the originally reported 0.3%, the Labor Department’s Bureau of Labor Statistics said.

While the change is only modest, it helped confirm that inflation was moderating as 2023 ended, giving more leeway to the Federal Reserve to start cutting interest rates later this year.
The revisions are done as a matter of course for the BLS, but garnered extra attention this year after the market reacted sharply to last year’s changes. Indications that inflation in 2022 rose more than anticipated drove Treasury yields higher and sparked worry from investors that the Fed might keep monetary policy more restrictive.
Fed Governor Christopher Waller, in particular, had called attention to the 2022 revisions, sparking market attention for the latest round.
Excluding food and energy, the so-called core CPI increased 0.3% for the month, the same as originally reported. Fed policymakers tend to focus more on core measures as they provide a better indication of long-run movements in inflation.
Also, the headline November reading was revised higher, up 0.2% versus the initial 0.1% estimate.

In aggregate, the revisions indicate that headline CPI accelerated at a 2.7% annualized rate in the fourth quarter, down 0.1 percentage point from the initially stated figures, according to Ian Shepherdson, chief economist at Pantheon Macroeconomics. Further out, the second-half revisions put CPI higher — by 0.003 percentage point, according to Goldman Sachs calculations.
The revisions amounted to “a damp squib,” said Paul Ashworth, chief North America economist at Capital Economics, though they could exert some influence on the Fed.
“Since some Fed officials were apparently worried about a repeat of last year — when the revision pushed up the monthly changes in core prices in the final few months of last year — the lack of any meaningful change this year, at the margin at least, supports an earlier May rate cut,” Ashworth added.
The Fed prioritizes the personal consumption expenditures price index as its main inflation gauge. CPI readings feed into the Commerce Department’s PCE calculation. The difference between the two gauges is essentially that the CPI reflects what items cost while the PCE adjusts for what consumers actually buy, accounting for changes in behavior when prices rise and fall.
Futures market pricing was little changed after the data release.
Traders still largely expect the Fed to hold its benchmark overnight borrowing rate steady when it next meets in March, then cut in May, to be followed by four more quarter percentage point reductions by the end of the year, according to CME Group projections.
— Reuters contributed to this report.
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