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The Brexit economy

Damage limitation is now the central task of British government policy

Amid the chaos in the wake of the referendum vote to leave the European Union, Mark Rutte, the Dutch prime minister, said that Britain had “collapsed—politically, monetarily, constitutionally and economically.” His verdict looked rash following the swift coronation of Theresa May as Prime Minister, a seasoned and pragmatic politician who had supported the “Remain” cause. The pound, which at first had suffered a dizzying fall, steadied, and the stock market rallied as the political turmoil decreased.

As well as pledging that “Brexit means Brexit,” May explained that her mission was to make the economy work better for all. But that will be a hard task. Brexit may trigger the first recession since 2008-09. If it does, the downturn is likely to be short and shallow, unlike the severe recession that followed the financial crisis. Yet it would make for a miserable start to the new Prime Minister’s tenure, and the economy’s longer-term prospects will be overshadowed by deep uncertainties about Britain’s new relationship with Europe. The dismal leitmotif of May’s government will be one of damage limitation as she strives to negotiate a post-EU economic settlement.

In the elite-bashing that characterised the “Leave” campaign, economic experts were panned for their pessimistic views. The main reason for their gloom in the short-term was the financial and economic uncertainty that would result from a vote for Brexit. If anything, the experts were not pessimistic enough. Philip Hammond, who replaced George Osborne as Chancellor of the Exchequer in May’s new cabinet, spoke immediately after his appointment about the “chilling effect” of the referendum result on the economy.

That effect has yet to be revealed in hard economic figures because of the usual lags in compiling them, but it is already showing through in plunging consumer and business confidence. Consumer confidence, which had already been declining before the referendum, fell after the vote by the greatest amount in 26 years, according to GfK, a market research firm. The survey showed that consumers have become much more apprehensive about the economic outlook over the next 12 months. Such fears will curb household spending—the survey revealed a big drop in people’s willingness to make large purchases.

A bigger worry still is that firms are rattled. According to a survey by YouGov and the Centre for Economics and Business Research, the proportion of businesses feeling pessimistic about the economy jumped from 25 per cent before the vote to 49 per cent after it. Expectations for domestic sales, exports and investment darkened. Business people are like the rest of us: when they are unsure about what’s in store they tend to freeze. They put projects on hold and suspend recruitment and in early July, Credit Suisse suggested that this is exactly what lies ahead. A panel of senior executives convened by the bank reported a drastic post-referendum deterioration in corporate sentiment. Two-thirds of the firms represented on the panel intended to postpone or cut their spending in Britain as a result of the vote. Recruitment plans were also curtailed. Nearly half of the executives said they would postpone hiring staffand almost a quarter said they would cut employment in Britain.

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In Prospect’s September issue: Paul Johnson argues that there is no getting away from the fact our economic prospects have got worse post-Brexit. Paul Wallace attempts to outline how the government will try and deal with that situation, while Nicolas Véron suggests that The City of London will decline outside the European Union. On a brighter note, Clive James explores what we can learn from the television show Mad Men. Also in this issue: Patience Wheatcroft, the Conservative peer, suggests that Brexit might not be a done deal with a rebellion in the Lords possible. Thomas Chatterton Williams explores the work and Beyoncé and argues that black artists are failing to say anything profound and James Dyson outlines how he would rule the world.