Posted in:

Could the customs union improve living standards?

My first week back from our holiday in Majorca and the UK’s maiden paper on our future customs union with the EU had a dramatic unveiling. Fourteen pages long, this is the UK’s attempt to ease the economic uncertainty over that’s squeezing living standards.  

The current customs union means that goods can travel across the EU without being charged a penny in tariffs. In 2016, imports and exports with the EU reached £553 billion alone – that’s 30% of our GDP.

It’s crucial these negotiations are done right otherwise this could kick back on the health of our economy.

To avoid a nightmare cliff-edge for manufacturers, the government wants to agree a temporary customs arrangement with the EU of no more than two years. This transition period will allow business to carry on as usual whilst the small print is worked out.

Although this request for a transition period is a relief for businesses, most have noticed that the long-term trading proposals put forward by the government will increase the red tape for importers/exporters.  

Why a customs union matters

The two government proposals involve either streamlining the customs process at the border or dispensing of them all together. The UK government also wants to leave the Northern Irish border without physical custom posts.  

As the UK government struggles to calm economic uncertainty over Britain’s divorce from the bloc, it’s not a surprise to see the EU stick to its line that it will only discuss the future relationship when more progress has been made on the split.

However, until there’s some clarity on what our future will look like, the pound is unlikely to strengthen enough to ease the squeeze on the consumer. A clearer picture could also encourage businesses to invest more in the UK, which will have a knock-on effect on the size of the economy and living standards.

Brexit tough on Brits

It’s fair to say the Brexit has been tough on Brits, with the weaker pound accelerating inflation as companies pass on higher import prices to the customer. Inflation reached 2.9% in May, well ahead of the Bank of England’s 2% target, before easing back to 2.6% in June.

Sign up to receive the Moneyfarm newsletter

Get the latest news and tips for managing your finances, straight to your inbox.

By making an investment, your capital is at risk.

Despite inflationary pressures on imported goods like food and clothing, a drop in the price of fuel meant inflation was unexpectedly steady at 2.6% in July.

This will take some of the heat off the Bank of England, which has been under pressure to increase interest rates to ease back inflation. After 100 months of rock bottom interest rates, the Bank of England wants to start normalising monetary policy but governor Mark Carney is unsure now is the right time.

Whilst savers are pulling their hair out over the 25 basis point interest rate, borrowers are making the most of cheap money. Whilst some Brits are being forced to take out loans to cover the higher cost of the weekly shop, others are having to dip into their hard-earned savings.

Average weekly earnings increased by 2.1% in the second quarter, better than expected but still not enough to offset inflation, which means Brits are having to either use their hard-earned savings or go further into the red to cover the cost of price rises.

Employment hits record high

Although official data released this week shows that employment has just hit a record high and job security is increasing, productivity of the work force is slipping as employers refuse to increase wage packets – bad news for the love lives of middle aged men.

Just why productivity has fallen over the last decade is unclear, and has left economists scratching their heads. As increased productivity feeds into GDP growth, this will support consumer spending and business investment, which underpins the valuation of investments.

Whilst borrowing is cheap right now, Mark Carney wants to increase the base interest rate off its 0.25% floor, which could be painful for the unprepared. The squeeze on living standards is tough, but don’t borrow like it’s going out of fashion.

In a world of instant gratification it can be hard to make more sacrifices when you’re already putting away for your retirement, but the future you will thank you

With inflation still set to outpace wage growth for some time to come, the UK Brexit committee’s first paper has been graded a C  – ‘promising, but must do better’.

Try Moneyfarm for free


Simple, efficient and tailored to your profile. The Moneyfarm investment plan maximises your long-term returns whilst protecting your wealth.

Sign up to MoneyFarm now: get access to your investor profile and discover the portfolio that is right for you, free of charge.

Get started