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Brexit isn’t over

By Catherine Garton
web posted December 5, 2016

For almost a year, world news has been diligently following the suspenseful “Brexit” referendum and its aftermath. Early in 2016, economists everywhere were dubbing the possibility of Britain’s separation from the European Union (EU) as a catastrophic action which would ruin the UK’s economy and strain the international market. The day after the June 23rd vote, the news of Britain’s exit broke and the value of the Pound immediately plummeted. Yet, the sky didn’t fall, and after the initial shock, conditions began to improve again. This has led many news organizations to proclaim that the consequences of Brexit were overhyped and that mainstream economists had been wrong in their predictions. While it’s possible for this to turn out as true, I think it’s too soon to tell, and as of now that is not the judgement I am making.

One site I found stated that, “The real Brexit casualty isn’t the UK economy – instead it is the reputation of the many professional economists who wrongly predicted doom and gloom as the likely aftermath” (Desjardins). And it’s true that the world hasn’t slid into an immediate recession, like so many predicted. In fact, unemployment remains low and consumer confidence has returned to normal levels. The Financial Times Stock Exchange (FTSE) 100 Index shows a 12% increase since the initial slump, which stacks up as a modest increase since pre-Brexit conditions. The Bank of England has also enacted several monetary policies which have helped, including setting record low interest rates (0.25%) in the hopes of stimulating investment.

Pound vs DollarBut most of the newfound optimism comes from the fact that conditions are not as bad as expected. That doesn’t mean there haven’t still been casualties. The growth rate slowed from 0.7% to 0.5% (which, though better than the 0.3% growth predicted, is still a drop). The value of the Pound has declined significantly; see the image at the bottom of this paragraph for a graphic representation. Also, a survey by the Federation of Small Businesses showed that the majority of small and medium businesses are now pessimistic about the future. (Most, in the past, have been optimistic.) Additionally, CPI inflation has spiked, rising to 1.0% from 0.6% in about a month. The key problem with increasing inflation is that once this figure rises above the rate of wage growth (currently just 2%), then real incomes will start to drop. Interestingly, the Organization for Economic Cooperation and Development has revised its current estimate of GDP growth upwards from 1.7% to 1.8%—but it predicted just a 1% GDP growth for the next year, citing, “Uncertainty about the future path of policy and the reaction of the economy” as a reason for high risk. Similarly, the Bank of England has increased its economic growth estimate for the coming year but decreased its expectation for 2018. The general pattern of economic forecasts is that the current situation is better than expected, but the long-term is less favorable. 

Furthermore, what a lot of articles seem to forget is that Britain hasn’t actually left the EU yet. Everything we have seen so far is simply a reaction from the global market in anticipation of Britain’s future departure. In fact, the UK won’t have fully separated until the summer of 2019. In the years to come, the country will have to pick through decades of EU agreements and partnerships to finalize the withdrawal, and we still don’t know what the ramifications of all that will be. I think they will be negative. For one, any policy that impedes the free flow of goods, capital, and human labor between countries is likely to result in lower economic growth. This is exactly what Brexit does; it removes Britain from the Eurozone, its largest trading market. While the details aren’t set in stone, it seems unlikely that Britain will be able to maintain the same degree of trading freedom that it enjoyed in the past. Similarly, British labor costs are likely to rise, since businesses will probably be denied the same level of access to immigrant labor. (Brexit, if you’ll remember, started as a backlash to the influx of immigrants permitted under the EU’s immigration policies, so I am assuming here that the UK will cut down on this.) Additionally, a significant component of Britain’s economic prosperity has been linked to its banking sector, which is heavily reliant on the movement of foreign capital through its banks. If this connection is severed by trade restrictions and British isolationism, it would be to the advantage of these banks to leave the UK, which would be harmful to the country. 

My point in all of this is not that Brexit will snowball into the apocalyptic situation it was predicted to be. In fact, I agree that the aftermath will not be as bad as many thought. There are some upsides, like the fact that tourism may increase now that the Pound costs less in terms of other currencies. The separation is eased by the fact that the UK always retained its own currency. I simply think that it is too soon to say that expert economists “blew it.” We are still only 4 months in, and most of the negative consequences are yet to come. In short, I think it is short-sighted to say that Brexit is inconsequential. ESR

This is Catherine Garton’s first contribution to Enter Stage Right. © 2016 Catherine Garton

 

 

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