So far so good? The economics of Brexit one week on..
A week is a short time in economics. So what , if anything, have we learned about the economic impact of the UK’s vote to leave the European Union? I would highlight four key points.
First, nothing has changed legally. The UK remains a member of the European Union, and will do for some considerable time to come. That means that in terms of trade, regulation, free movement and so on, the UK government and private sector are operating under precisely the same rules as they did last week. Any impacts therefore are the result of expectations – or uncertainty – about what will change in the future.
Second, the impact on financial markets has been very much as predicted. My expectation (and that of most others) was that a vote to Brexit would lead to a sharp and significant (but by no means uncontrollable) fall in sterling and UK equity markets (more so for the FTSE250 than the much more international FTSE100); but that it would if anything lead to a fall, not a rise, in UK government bond yields; and that there would be no panic nor any systemic risk to the financial system. This is not 2008; what I expected was sharp price adjustments, and some volatility, but no panic or crash. And so it has proved. Of course, the credit rating agencies, in their classic knee-jerk fashion, have downgraded the UK’s sovereign credit rating; and, as on previous occasions, this has coincided with the UK government being able to borrow at the lowest interest rates in recorded economic history (going back to the 18th century at least, but probably far longer).
Third, that the impact on the “real economy” would come not primarily from the financial markets, but from the impact of a prolonged period of uncertainty on business and consumer confidence, and hence on business investment, consumer spending, and hiring. There is already considerable anecdotal evidence of this. Again, this was predicted (for example in the analyses of the short-term impact of a Brexit vote produced by both NIESR and HM Treasury). It is too early to say whether our estimates of this impact are roughly accurate; but the predictions of a significant ,but not disastrous, downturn (perhaps resulting in a technical recession, perhaps not) do not look unreasonable.
One factor which was not much highlighted during the campaign, however, may have considerable political and economic relevance. That is the possibility of a fairly sharp reversal of migration flows between the UK and the rest of Europe. Not only will a downturn, especially if it results in a sharp fall in hiring, reduce immigration, but there may be significant flows in the other direction. In addition to the economic drivers, there may also be psychological ones – if citizens of other EU member states feel less welcome here, not to mention uncertain about their future status, as anecdotal evidence suggests many do, they may choose to return. This would have the paradoxical impact of reducing public concerns about EU migration at the same time as magnifying the negative economic impacts. It will not just be relatively low paid workers in low skilled jobs that we lose.
Fourth, we know no more about the medium to long term impact of Brexit on UK growth, output and productivity than we did last week. What is notable however is that the contradiction at the heart of the Leave campaign – the desire by many, perhaps most, Leave campaigners to retain most if not all of the UK’s current economic and trading relationship with the rest of the EU, combined with the clear view of most Leave voters to end or at least severely restrict the current arrangements governing free movement – has been exposed even more quickly than some of us expected.
This contradiction was always obvious; however, the Leave campaign succeeded in having it both ways during the referendum campaign. The universal derision that greeted Boris Johnson’s Telegraph article – where he argued that the UK could retain membership of the Single Market, Britons could continue to work, live and retire in the rest of the EU, but we would impose immigration restrictions on Europeans moving to the UK – has illustrated that this will no longer wash. As all the credible economic analyses produced during the campaign showed, how the UK’s new political leadership resolves this contradiction will be crucial to the longer term impacts of Brexit.
So if i were, at this early juncture, to summarise how well we economists have done in predicting the impact of a Brexit vote, I’d say “So far, so good”. Of course, that’s what the man who jumped off the Shard said - as he passed the 27th floor..