For the first time since 2012, the economy of the United Kingdom contracted during its second fiscal quarter, from April-June. The economic decline comes at a time when businesses are worried about the uncertainty posed by a no-deal Brexit, which could disrupt trade links across Europe. Prime Minister Boris Johnson has signaled that he is open to leaving the EU without a deal if negotiations fail on Oct. 31.
Though the entire debate over Brexit may feel a world away from Georgia, residents should keep an eye on what happens. If the U.K. leaves the EU without reaching a deal, the resulting depreciation of the pound will damage the Georgia economy.
In response to the economic report, the value of the pound sharply declined, falling to $1.21, its lowest point since 1985 outside of a brief devaluation in 2016. By disrupting trade, a no-deal Brexit could lead to more economic growth concerns, which could result in further depreciation.
A weaker pound has two major ramifications for the state economy.
First, the depreciation of the pound relative to the dollar will hurt our exporters and worsen our trade balance with the U.K. To understand why, consider the following scenario. Say you have £10, and you want to buy as many $5 sandwiches from Subway as possible. If £1 is worth $2, then you can buy four sandwiches. However, if £1 is worth only $1, then you can only buy two sandwiches. Likewise, a depreciation in the pound will encourage buyers in the U.K. to buy fewer goods from Georgia and the rest of the U.S.
With the world’s fifth-largest economy, the U.K. offers a large market for hopeful sellers, and the U.K. is a major trading partner with Georgia. According to the Georgia Department of Education, the U.K. was the sixth-largest export market for Georgian goods in 2018, and the U.K. served as a critical market for aerospace and agricultural exports, two of the top exporting industries in Georgia.
A drop in exports could have serious ramifications for Georgia’s economy. Exports comprised 6.7% of Georgia’s GDP in 2017 and supported 182,000 jobs in 2016. These were likely high-paying jobs as well — in the U.S., wages for jobs supported by exports are 18% higher than the national average.
Second, a weakening pound could lead the U.K. to sell off its investments in Georgia. When a country wants its currency to appreciate, it may choose to sell off its assets in other countries and buy more of its own currency.
If the U.K. chooses to sell off its foreign assets, it would likely hurt Georgia’s economy and workers. In 2015, the U.K. was among the largest sources of foreign investment, along with Japan and Canada. Foreign investments account for a sizable portion of the economy. There are 3,000 foreign-owned facilities in Georgia, providing jobs to 239,200 Georgians as of 2015.
The Office of the United States Trade Representative reports that in 2015, foreign investment accounted for 6.3% of private-industry employment in Georgia, highlighting the role foreign companies play in our economy. The U.K. selling its investments in Georgia could put thousands of Georgians at risk of losing their jobs.
So, when Johnson and other British politicians threaten to leave the EU without negotiating trade deals, Georgians should feel nervous. Though it may occur in another continent, a no-deal Brexit could have damaging and lasting consequences for our economy.