It will take ages before we are able to work out Brexit’s impact
How is the UK economy performing since we voted to leave the European Union at the end of June? The answer is that we don’t really know – and won’t for some time. The figures we have so far present a very incomplete picture.
Retail sales appeared to hold up well in July, while CBI surveys indicate resilient manufacturing orders and output – possibly helped by a weaker pound. Inflation picked up slightly but it remains very low, at 0.6pc. However, the fall in sterling is starting to push up the cost of imports. As these higher costs feed through to consumers, they could well put a brake on spending growth – as we saw when the pound fell sharply after the financial crisis.
We are clutching at straws, however, if we make too much of these very early and fragmentary pieces of information. We still have no comprehensive official figures covering any period since the referendum for industrial production, GDP, employment, investment, broader measures of consumer spending and overseas trade. It is far too early to draw any substantive conclusions about the economic impacts of the Brexit vote.
When will we be able to do so? The analysis we conducted at PwC before the referendum suggested that there are three key areas of likely impact – and the timescales to assess them stretch from about six months after the referendum result to a decade or more.
The most immediate impact is political and economic uncertainty. This was particularly acute at the beginning of July after the Prime Minister resigned and the leadership of the country was adrift. The formation of a new government under Theresa May has stabilised the political situation – though the direction of policy is still unclear on many issues, not least the timing and content of future Brexit negotiations with our EU partners.
A degree of uncertainty could also persist during these negotiations – from next year onwards. However, based on the contacts with business that I have had over the summer, most companies seem prepared to take time to assess the full implications of the Brexit vote. They have absorbed the initial shock of the EU referendum vote and are now in “wait and see” mode. Day-to-day business carries on as normal, but there may be a more cautious approach to big strategic investments in the UK.
I do not find it surprising that retail sales are holding up in the aftermath of the Brexit vote.
Uncertainty will affect consumers mainly through its effect on jobs and investment – and it will take a while for these to feed through to individual spending decisions. We will need to see at least three to six months of data before we draw even provisional conclusions about the impact of Brexit uncertainty on jobs, investment and consumer spending.
The second key time horizon is when negotiations about the UK’s relationship with the rest of the EU are taking place between 2017 and 201920. Over this period, we will become clearer about how close our trade relationship is with the European Single Market, not just generally but in key sectors like manufacturing and financial services. If it is possible for the UK to strike a deal with other EU members which largely preserves our access to European markets in manufacturing and key services, this will be a good Brexit outcome – not just for the UK but for the rest of Europe. But it is also possible that the negotiations become confrontational and unproductive. We will not know much about this until Article 50 is triggered next year.
The third time horizon we need to think about is the long term – how strong economic growth will be in the 2020s and 2030s in a UK outside the EU. Here, there are two alternative visions of the future for the UK outside the EU.
Many – like myself – who argued for a Remain vote worry that the longterm economic impact of Brexit is quite likely to be negative. In the past 30 to 40 years, the performance of the British economy benefited from membership of the European Economic Community and the EU. The UK turned around from being the “sick man of Europe” in the 1960s and 1970s to becoming one of its better performers from the 1980s onwards. Our closer relationship with European markets played an important part in this improvement in economic performance, as new investment was attracted to the UK – for example in the car industry.
The alternative view is that there is now a big world of opportunity in rapidly growing markets such as China, India, Africa and South America – and UK economic growth could be boosted by forging stronger trade links with these countries and regions. The challenge here will be our ability to gain access to these markets on good terms. That will not be sorted out until we have completed our negotiations with the EU and established a new relationship with the World Trade Organisation, the guardian of global trade agreements.
In summary, therefore, we may learn more about the short-term impacts of Brexit over the next six months or so. But the more profound effects will be felt over years and decades.
Previous experience suggests we should not be surprised if it takes a while for even the short-term impacts of the Brexit decision to feed through to the UK economy. In the early 1990s, it took one to two years before high interest rates pushed the economy into recession. Even though the first tremors of the global financial crisis were felt in 2007, the economy did not move decisively into recession until late 2008.
I’m keeping an open mind on the economic impact of Brexit. By the end of this year, we should be clearer on the effects of heightened uncertainty on the UK economy. But the other economic impacts will take years and possibly decades to unfold.
In the meantime, however, consumers and businesses would be wise to adopt a “wait and see” approach, and not rush to either a negative or excessively positive view. Decisions which have yet to be taken and discussions which have not yet started will have a crucial impact on the full economic consequences of Brexit.
‘Most companies seem prepared to take time to assess the full implicaitons of the Brexit vote’