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Brexit for Dummies Pt. 2: Consequences

Her Campus Placeholder Avatar Gabrielle Grifno
Her Campus Placeholder Avatar Sabrina Pederson
This article is written by a student writer from the Her Campus at JHU chapter.

The specifics of long term economic consequences of an independent Britain are not entirely clear, and as of yet the British economy is not immediately headed for a recession, according to most economists. So far, the “economy seems to be faring better than some economists had predicted. Consumer spending appears to be healthy” according to The Economist in its September analysis of the several truths and myths surrounding Brexit. The claim was based on the 4% rise in sales compared to sales in 2015 markets saw after the referendum results caused initial turbulence in the financial market. However, The Economist warns, “consumers do not immediately internalise bad economic news”, and the prospect of Brexit has not directly affected Britons’ disposable income, and therefore consumer habits… yet.

Overall, it is certain that the recession is not in the cards for Britain in 2016 as evidenced by the 0.5% growth in the UK’s gross domestic product (GDP), one of the most basic indicators of economic health, in the third quarter of the year which greatly surpassed the Bank of England’s estimates. Even by international standards, British economic growth is still good and in line with trends since 2010.

However, the expected behavior of companies, the movement of labour, and future trade deals between the UK and the rest of the world post-Brexit gives economists the most cause for concern. Already, “growth in business credit has markedly slowed”, and the Bank of England is showing that “planned investment” by large businesses (which must plan ahead by at least three years) is slowing in response to Brexit. According to The Economist, “of particular concern is the manufacturing sector, which economists had hoped would benefit from the weak pound. However, it shrank by 1% compared to the previous quarter, its worst performance since 2012. Construction saw a bigger fall, of 1.4%, suggesting that firms and individuals are holding back on investment spending.”

The student of macroeconomics will immediately see this type of trend as a huge problem for long-term economic stability, as every major economy depends upon investment by businesses to continue to provide and expand jobs, as well as produce and expand exports of goods and services. British exports have already been low compared to their imports, and the majority of British exports have thus far gone to other EU nations. For Brexit to succeed, the UK must focus enormous energy in creating excellent trade deals with nations around the world, and must not continue to ignore and scoff at the EU (its most critical potential trading partner post-Brexit), as it has been doing during negotiations with EU leadership over the past couple of months.

Another major concern is over the stability of British jobs. Part of the reason voters supported Brexit was that a UK independent of Brussels would have more control over immigration, and therefore, its labour market. However, economists have known for decades that immigration bolsters economies overall, and putting a block on immigration could place British economic growth behind that of more welcoming countries in the long-term.

Of particular concern, however, is the prospect of job loss in the financial services sector, a critical component of the British economy as it contributes 12% of the national tax take and banking is the UK’s largest export. London has traditionally been one of the strongest global centers of finance, competing with New York, Singapore and Hong Kong. But, should British banking institutions start shifting jobs elsewhere due to lack of confidence in the British economy and financial market, the 2.2 million Britons that work in business or its supporting infrastructure must be affected negatively and will either flee to another financial center or simply lose their jobs altogether. The British economy must take a severe hit if this scenario meets analyst’s expectations.

In short, should a hard Brexit survive, Britons must plan for some “difficult times ahead”, as noted even by the new Prime Minister Theresa May, who is actively negotiating Brexit with the EU. The reason is simple: a move like this is a shock to the system. If navigated wisely by Britain’s new chancellor, Philip Hammond, some positive loosening of Britain’s “over-tight spending plans… [and] regressive welfare reform” and greater government investment in much-needed stimulative infrastructure projects could result from Brexit. Additionally, a hell of a good stack of international trade deals must be negotiated in time by May’s administration. Even then, it is not wholly clear what might come when “rising inflation [causes] real wages to fall, pushing down living standards” for hardworking Britons. May claimed in her first major interview since taking office (with CNN) that the UK “will continue to be a bold, out-looking country” and that her government will maintains an emphasis on “ensuring economic stability and a strong economy for the future”. We hope, both for Britain’s sake and the sake of the stability of the global economy, that May delivers on this optimism.

 

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Further reading:

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Gabrielle Grifno is a JHU Biomedical Engineering major of the Class of 2020. Interests include: U.S. foreign and domestic policy, the 2016 Presidential Election, global economics, and feminism on college campuses and around the world. Loves comfy sweaters, hot chocolate and lively debate.
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