Whether you voted for it or not, Brexit now seems inevitable. But what does this actually mean, for the average person and for the country? Given the lack of clear direction indicated by the government, it is understandable if you’re confused trying to keep up. In this blog we will try and identify the concrete consequences of the vote across a range of topics, so that you can better understand the evolving situation. What does Brexit mean…
…for the economy?
On June 23rd the British people voted to leave the European Union (EU) 52% to 48%. For many of these voters the economic arguments were crucially important: would the UK save money by leaving? In this article, we will look at the real economic consequences the vote has had in the month since “Brexit” was announced to and answer that question, rather than any projections or predictions.
As so many politicians have taken care to stress, the vote for Brexit has no legal value. Nothing’s changed. So you’d be forgiven for thinking that things are pretty much as they were before. Unfortunately, the lack of leadership from the government, as represented by its failure to clearly lay out the direction negotiations, has created an atmosphere of uncertainty that has touched each of us.
First off, it is harder to find jobs. The Recruitment and Employment Confederation’s (REC) monthly report shows that the number of permanent jobs on offer by recruitment firms in the past month has fallen at the fastest pace since May 2009 – a time when the UK was in the heart of a global recession. Sure, this is only one month’s data. But it is also the time when most individuals finish university and are looking for jobs. To have a decline now – when there should be a traditional increase – is worrying.
There is now a lot of pressure on the government to start making deals, fast. Ford makes engines in Dagenham and Bridgend, and exports them to the EU where they are assembled. The cost to the company of the UK leaving the EU without the necessary trade deal in place would be roughly $1 billion. Therefore it is considering closing them to cover that cost. Nearly 4,000 people are employed on these plants.
Holidays are more expensive. Going abroad with a weaker exchange rate means having to exchange more pound sterling to get the same amount of Euros. And going to the shops will be more expensive too because importing will cost more. When a currency falls in value, inflation increases. Since the dramatic fall in value of the pound (to a 31-year low) it is therefore likely to expect inflation. This too will cause an increase in prices.
Farmers – as well as academics and researchers – are having trouble with their funding. According to the Earl of Sandwich, farmers in 2013 received a total of £2.7 billion of subsidies. The government has refused to commit to maintain this level of funding, not least because of the continued pursuance of austerity.
The Big Picture
And what about the country more generally? So far, littles is clear except with what has happened inside the UK. The Bank of England has cut is growth forecast 2016 – 2018 by 2.5%. This represents the largest downgrade in the space of two reports for 23 years, according to Larry Elliott writing in the Guardian. It means that the UK economy is expected to grow less. This means that the government will have less money and therefore less will be invested in the NHS, education, and emergency services for example. Why?
On the Monday after the vote, Standard and Poor knocked Britain down two notches (the first time this has been done by S&P) in one go: from triple-A grade investments to double-A. The UK had enjoyed the top credit rating since 1978. Losing the rating means it will cost the UK more to borrow money, because the rating agency no longer believes there is an “extremely strong capacity to meet financial commitments” (S&P’s definition of a triple A status). If the UK cannot borrow money at convenient rates it will instead turn to home-grown solutions, namely higher taxes. These are likely to dampen economic growth.
Equally, the attempts to prevent the fall in productivity might well be costly. The Bank of England has laid out a four-fold plan. It will cut bank lending rates to 0.25%; it will create a new Term Funding scheme to provide £100 billion of funding for commercial banks, as an alternative source of money now that lending rates have been cut; it will purchase £10 billion of UK corporate bonds; it will purchase £60 billion in UK government bonds (quantitative easing).
This could be costly, both in terms of money and political capital. The last time that the UK’s banks were under pressure – in the financial crisis of 2008 – 2012 – the government spent £123.93 billion bailing out the banks, according to some estimates. This was not a popular move to say the least. But will the British electorate have anything to say now that it was their choice to inflict this pain?
More immediately though, let’s look at the consequences of the interest rate cut to you. First off, you will get less interest on any savings you may have tucked away unless your money is in a locked fixed-rate account. On the other hand, if you a have a tracker mortgage you will see your monthly payment go down – that is, unless your bank decides not to pass on the cut. But that’s about it for the good news. It is likely that pension schemes will be hit.
Reflections: Healed and on its way?
The “sick man of Europe”, the UK joined in 1973. It did so as the poorest major European nation, with average incomes falling by £185 a year and had regular power cuts. Before Brexit, the UK was leading the field. The correlation (if not the causation) is clear.
Fundamentally, the question with which we are left is this: were the voters aware of how much they had to lose? If the 52% did know and chose to suffer the economic harms regardless then all that is left is a tough job for the Bank of England and the Treasury to try and minimise the harm, whilst the government must make sure that this doesn’t hit the poorest hardest.. If the 52% did not know, it is doubtful that Boris Johnson’s promise to apologise if the economy crashes will be quite enough.