Brexit and the economy, six months after the vote

During the referendum campaign some of those on both sides made the most dire predictions of disaster if their opponents won and Panglossian predictions of paradise on earth if their own side did.

I was deeply sceptical of much of this from both sides.

Since the referendum produced a vote to leave the EU Britain has largely been in a "phoney war" period as the main impact of leaving will not come until we actually leave, and we have not yet even given formal notice under Article 50.

Nevertheless many people who are still fighting the referendum campaign have addressed evert piece of economic news through the prism of trying to prove they were right all along.

In terms of what has happened since the vote

1) The initial result was a dramatic fall in both the pound and the stock exchange.

2) The pound is still much lower against other currencies than it was before June 23rd, though it has remained stable at a new and lower level rather than going into free fall.

3) The stock market has recovered and is now at record levels. A major part of the reason for this is that many countries in the FTSE index get a lot of their income from abroad and the low pound thereby boosts their value.

An interesting analysis in the FT this week, "UK stock market needs to refresh BREXIT playbook" illustrates that a very substantial proportion of the strong performance of the stock market is from companies with substantial foreign earnings, but also indicates that there are substantial investment opportunities in the post-Brexit world: the author quotes Yael Selfin, head of Macroeconomics at KPHG, as saying that the UK economy is performing much better than some had feared and there are still plenty of opportunities for companies whose business is predominantly within the UK.

4) Economic growth appears to be steady

When the ONS first published growth figures for the quarter after the referendum vote they showed a drop from 0.7% GDP growth in the quarter before the referendum and 0.5% for the quarter after - a drop, but to a figure which was higher than expected and still reasonably healthy.

At that stage of the game both "Remainiacs" and "Brexiteers" could argue that the GDP figures were helpful to their case - the former because growth was down, the latter because it was much better than forecast,

However, in a change which I am very surprised has not had much more publicity, the ONS has now revised down the GDP growth figures for the quarter before the referendum and revised up the figures for the quarter after, in each case by 0.1 of a percentage point (which. when you are talking about quarterly GDP growth figures is a rather bigger deal than it sounds.)

So instead of having fallen from 0.7% per quarter to 0.5% per quarter, economic growth was steady at 0.6% growth in both quarters.

5) Employment is at or near record levels, though the improvement has slowed lately

Britain's unemployment position has improved dramatically over the last five years. For the past several months employment has been higher than the same stage twelve months before and at or close to an eleven-year high, while unemployment has been at low levels. The most recent set of quarterly data suggested that the improvement has slowed, but the employment position remains much more healthy than at any time in the recent past, and it is quite possible that the slowdown is mainly because Britain is approaching the effective maximum level of employment: rit may not have anything to do with the Brexit vote.


Putting all these pieces of evidence together, what has been the initial impact of the vote to leave?

There have been some suggestions that the pound was overvalued before the Brexit vote, but there is no reasonable doubt that the vote was the direct cause of the pound's sudden fall. This has helped some businesses particularly, exporters, but harmed others because it means that all imported goods, raw materials and energy are more expensive than they would have otherwise been.

Given that the stock market plunged immediately after the vote, and a substantial part of the subsequent recovery in the stock market was due to the low pound, a reasonable person could argue that the stock market is lower for any given level of the pound than it would have been had the vote gone the other way.

So it is reasonable to argue that there has been a modest negative initial effect on the British economy as a result of the "Leave" vote, something which even some people who supported Leave always accepted was possible.

However, the fact that employment is at or close to an 11 year high and that growth has remained at an annualised rate above 2% suggests that the more apocalyptic projections from the remain side - that the mere vote might cause a recession - have certainly not come true.

The real proof of the pudding will come when Britain actually leaves and will depend on what sort of deal we can negotiate.

I believe it is premature to judge whether, from an economic perspective, leaving the EU will make Britain better or worse off in the long run, but I think Britain can remain a rich and successful country outside the EU. What we need to focus on now is how to ensure the UK takes the best advantage of the opportunities that leaving will bring while keeping as good a relationship with our former EU partners as possible.

Another very interesting article was published today in the Independent by  Ashoka Mody, who is Visiting Professor of International Economic Policy at Princeton University and was previously  deputy director of the International Monetary Fund’s European and Research Departments.

His article,

"The Economic consensus was horribly wrong and here are the real reasons Brexit is succeeding,"

takes, as the title suggests, a very positive view of Brexit. Here are three extracts from his conclusion:

"Once details become clearer, businesses will adapt. The fact that six months after the decision, the economy is doing so well is a judgement that Brexit could deliver a net economic dividend.

But the greater prize from Brexit lies in a possible political dividend. Western democracy is under the threat of authoritarian populism. Mainstream political parties, having for long failed to heed the calls of those being left behind, are being pushed aside by charlatans."

"The Brexit vote was a cry of despair by the poorly educated and those employed in dead-end jobs; many such Brexiters have reason to fear that their children will do even worse than them. Through their vote to leave the European Union, the most vulnerable have given another opportunity to the Conservative Party."

"Brexit will happen.

Prime Minister Theresa May’s Government must heed the true message of the Brexit vote.

The task is to regenerate the communities that have turned into wastelands and spread quality education to prepare ever larger numbers of British citizens for the rigours of a 21^st century competitive global economy.

If the Government succeeds in this greater task, then Britain would not only have done well for itself, it would become a beacon amidst the desolate and depressing decay of Western politics and social norms."