The dust is not even close to settling on the UK’s Brexit referendum, but, against a backdrop of frozen investment funds and a 31 year low GBP/USD exchange rate, I am being asked regularly for my view on what’s going to happen next, what this means for the UK’s economy and what it means for individuals.
The number and variability of potential outcomes is enormous as there is no realistic plan for what happens next – every variable and every possibility remains open. As such, it’s worth considering the likelihood of the outcome being positive, insofar as the UK is holistically and objectively better off than had it not voted to leave the EU.
And my view is broadly in line with the economic consensus: such are the challenges that face the UK economy, the likelihood of a positive outcome is pretty miniscule. I summarise my reasoning in brief below:
- Intransigence regarding control of immigration means it is unlikely that the UK will have access to the European single market as you cannot have one without the other
- Regulations and specifications have to be in line with those of the EU to allow the UK to do business with them, eliminating any benefit which could be gleaned from deregulation.
- Foreign Direct Investment (FDI) will be negatively affected as non-European firms will favour EU cities for their European operations to allow for ease of trade with Europe. It is likely that decisions on this will be made over coming months as it becomes clearer what a post EU Britain will look like. Obviously any reduction in existing or future FDI will have a negative effect upon earnings and employment.
- The EU has no incentive to make the negotiations easy for the UK, a positive outcome from which may encourage further EU disintegration.
- Time taken to renegotiate trade deals (both inside and outside the EU) is typically measured in years, not months and the UK will have many of these to renegotiate. It won’t be ‘business as usual’ for some time. If these negotiations are not complete inside two years of Article 50 being invoked, agreements will likely default to World Trade Organisation rules, many of which are unfavourable (e.g. 10% tariffs on cars). This would have myriad effects on prices and productivity
- The lack of expertise in trade negotiations amongst UK civil servants is incredibly low – the FT reported that the UK has only 50 trade negotiators experienced in international trade deals. This may have a further negative effect on the outcome that we can expect from our post Brexit trade deals.
- Economic turmoil will pervade. The Bank of England and government will have to contend with a likely fall in domestic demand, coupled with imported inflation (due to the short-medium term weakening of sterling) and corresponding falls in real wages. The way in which these factors will balance is unclear.
- Any increase in tariff and non-tariff barriers for our trade will have the effect of increasing prices and discouraging international trade. This will be to the detriment of the UK consumers and workers. However, it is worth noting that if the UK were to stop levying tariffs on non-EU imports, then this would help to counteract price increases, though it would likely mean greater competitive pressure for UK firms.
- It leads to uncertainty for the UK’s banking sector (one of the only sectors in which the UK has a considerable comparative advantage) with regards to passporting of services into the EU and control of EU regulations and rules. The major sticking point for the former will be the argument on immigration (no free movement of labour, no passporting), whilst we will have no control over the latter and new rules may be to the detriment of the UK’s financial sector.
With the range of possibilities being so broad, the extent to which each of the above points will impact the UK economy is unclear. Rather, the above are some of the more foreseeable and common sense challenges which the UK should be mindful of.
Indeed, the least tumultuous approach for the UK would almost certainly be the one for which it has no political mandate: to remain in the single market at the cost of “taking back control” of its borders. Even under this scenario, as the UK would have to abide by the rules of the single market, whilst not being part of the body which constructs its rules, it would undoubtedly still be worse off than a Remain vote would have left us.
There are reasons why *deep breath* the Bank of England, the IMF, the OECD, HM Treasury, the World Bank, the FT, the Economist, the LSE, that bloke from Money Saving Expert and 9 out of 10 economists considered that the UK would, on the balance of probabilities, be worse off outside of the EU.
But, in the immortal words of Michael Gove – “people in this country have had enough of experts.” More fool them.
“Very pessimistic” I hear you say! “An economist talking Britain down again” shouts Farage!
It is not Britain that I’m talking down. Rather it is a collective decision which represents the greatest act of self-sabotage of a country’s wellbeing by its own population that I can think of. Well, at least until the US elections in November…