Before last year’s Brexit vote, there were warnings from many economists that the UK would suffer a catastrophic economic shock and be catapulted into recession by a Leave vote.
As it turned out, those predictions were a touch pessimistic. But one year on, what do economists and businesses think of the aftermath of the vote? And what do they think the future holds?
‘Wheels coming off’
David Owen, chief European financial economist for Jefferies, still thinks the UK could be in for a rough ride. “For six months or so after the Brexit vote, the UK economy as a whole also held up surprisingly well, helped by the significant monetary easing announced by the Bank of England last August and the move down in the currency,” he says. “But recent weeks have seen growing signs of the wheels coming off the UK recovery, with real incomes squeezed by the decline seen in real wages.”
UK wage growth slowed down this year and started to lag behind inflation in May. Prices are rising in the shops faster than people’s wages are going up, meaning the amount people have to spend is going down in real terms. In the future, “much will depend on what deal the UK ultimately manages to strike with the rest of the EU, but with Brexit discussions now commencing, uncertainty and political risk will dominate discussion,” he adds.
Last year, not all economists thought the shock to the economy would be so profound. Martin Beck of Oxford Economics said then that although the Brexit vote would hit the UK, it would avoid recession. Since a majority of voters chose to leave the EU, it was “not obvious” that business and consumers would cut back on spending immediately, he says.
However, he still believes that UK growth will slow down, partly because of “uncertainty over Brexit negotiations and uncertainty as to what the outcome will be”. After the Brexit vote, the pound dropped sharply against the euro. It is still trading about 14% down against the dollar. As a result of that devaluation, UK consumers are starting to be squeezed by price inflation.
However, exporters are feeling the double benefit of a weaker pound and no change to tariffs to the EU at the moment, Mr Beck says. What happens next to the UK economy “depends on the deal” that the UK government manages to come up with. Research done by Oxford Economics “suggests a long-run hit to the economy” with a gradual cumulative effect. By 2030, the UK will have missed out on 3% to 4% of growth, he adds.
Last year, some economists were positively gung-ho for Brexit. Prof Patrick Minford of Cardiff University is a member of Economists for Free Trade, formerly known as Economists for Brexit. Prof Minford says that “the consensus was for a recession”, but “we thought it [the UK economy] would be pretty much unaffected”. However, he says Economists for Brexit “didn’t get the scale of the devaluation right” for sterling. They thought devaluation would be about 6% and it turned out to be more like 15%. However, this isn’t necessarily a bad thing, he says.
Having a devalued pound boosts demand for exports, Prof Minford says. Businesses invest more money because they can sell more easily abroad. And more expensive foreign goods encourage consumers to buy British, giving an extra push for business investment, he adds.
The devaluation is “likely to remain for quite some time” because of the length of the Brexit negotiations. He says that the eventual agreement is likely to be a compromise between soft and hard Brexit. If negotiations are derailed, this may be positive for stock market sentiment, as the UK could move towards free trade agreements faster.
But the economy will probably move towards having more of an emphasis on free trade gradually, he adds. Mr Beck of Oxford Economics also says that being outside the customs union with the EU may bring benefits. Trade with the EU may not be as important as building trade links with rapidly growing large economies such as China and India, he says. Even before Brexit, exports to the EU had been falling relative to other markets. China and India are “growing very quickly”, whereas European countries are wealthy and so are growing more slowly as a market, Mr Beck says.
Boom, bust, boom?
Some economists have a completely different take on where they think the economy is heading. Douglas McWilliams, deputy chairman of the Centre for Economics and Business Research, said after the Brexit vote that he expected a boom. But now there will be a hit to the UK economy due to uncertainty and a fall in immigration.
The creative industries fuel a large chunk of the UK economy, he says, and without immigrants to stimulate new ways of thinking, business will be hobbled. “The real benefit [to immigration] is that skill bottlenecks are solved,” he says. Eventually, the UK will “change what we make and sell” in the longer term. But he expects negative effects on the economy to outweigh positive effects until 2030.
Business lobby group the CBI says that growth in the UK economy will “shift down a gear” in the short term as household spending slows down. “The less likely a Brexit deal starts to look, the harder it will be for firms to recruit and retain talent as well as push the button on big investment decisions. We must get Brexit right,” says CBI director-general Carolyn Fairbairn. Big firms such as Rolls Royce have said they want as little change as possible after Brexit. And car-makers are worried about a trade “cliff edge” if tariffs are suddenly imposed on EU imports and exports.
Finally, what do people in the UK think about Brexit? Joe Twyman from pollsters YouGov says that in the main, they haven’t changed their mind from how they voted last year. “Nothing has changed, because nothing has changed,” he says. “Negotiations have just started.” One interesting twist is that 26% of the population that voted Remain believe the UK should go ahead with Brexit, because that’s how the majority voted, he says. However, he adds that the political situation is “very fluid”, and depending on how the negotiations go, those opinions could easily shift.
Author – BBC