Tough challenges with Brexit lie ahead but if Britain seeks sustained economic success outside the EU, we must all buckle down, argues James Sproule
Brexit means Brexit, but what the impact of withdrawal from the European Union will entail is still far from clear. What is evident, though, is that the question will dominate much of the economic and business debate this autumn.
Whatis also transparent is that economists made several predictions in the run-up to June’s referendum, and did not cover themselves in glory as a result. So let’s review where we thought we might be and what we think now.
Given market volatility, sterling was predicted to be the first casualty, and so it proved, falling by 11 per cent in two trading days. The surprise is that investors were unprepared for a result where polling had been close and where the UK’s current account deficit was shouting that sterling’s valuation was out of line.
Looking forward, we have given the economy a boost through devaluation, but this is not a sustainable path to prosperity.Predictions were for a stockmarket fall of between 20 and 30 per cent. This sort of decline would require a sharp drop in earnings and a collapse in confidence about the viability of those earnings.
Pretty quickly it was realised that sterling’s fall was going to boost FTSE 100 earnings, so the index duly went up. As it became apparent that the consumers who voted for Brexit remained confident, business was reassured. Soon enough, even those stocks dependent upon domestic income revived. Confidence is fickle, but there is everything to play for here.
Interest rates were forecast to rise following the vote for Brexit as investors saw increased risks. Rates have, of course, been reduced (the IoD believes this is a mistake) as investors felt the UK remained a good bet. More critically, spreads have fallen, so the real cost of capital to business remains at historic lows. We have significant concerns about monetary policy, but they have little to do with Brexit.
Dire warnings were made on the viability of the state pension ‘triple lock’ (it was unsustainable before the referendum and it still is). Moreover, rising share prices means the value of pension pots has not declined as feared. What has emerged is a growing appreciation that the real concern should be the collapse in bond yields – another global problem well beyond Brexit.
And so to the issue of trade: just as it takes time to establish new trading partners, time is also required to loosen such relationships. Trade is perhaps the most critical area where Brexit negotiations will determine many subsequent business decisions.
Will an EU desire for economic success trump protectionist tendencies? It is too early to tell, but as global trade deals run into trouble, we might just find ourselves at the front of some unexpected queues.
We are not starry-eyed optimists about the prospects for the UK economy and business outlook. Brexit presents challenges, but they are by no means the only questions, nor even potentially the most intractable ones. To prosper in a post-Brexit world, we are all going to have to work hard; that may have always been the case, but we have now made that fact obvious.