Brexit referendum commentary - Monthly Economics Bulletin - University of Derby

Brexit referendum commentary

Dr Eugene Michaels and Melanie Powell, Senior Lecturers in Economics at the University of Derby

As the referendum campaign drew to a close, it became clear that, despite their prevalence, economic arguments were not going to settle the debate. Warnings from the Remain side of forecasted economic losses were dismissed as scaremongering while claims of outward-looking long-run prosperity from the Leave side were rejected as fanciful. The social and economic divide then became clear with the tallying of the votes giving a decisive victory to the Leave campaign. It can be argued that the votes cast had little to do with embracing the liberal freedoms espoused by the Leave economists and more to do with anti-establishment sentiment, immigration fear, conservatism and protectionism. However, the previous overconfidence of capital and betting markets in a Remain outcome clearly shows the disconnect between them (London) and the UK (English) economy as a whole. Brexit has now raised political and economic uncertainty in the UK with consequences in all near, medium and long term.

In the immediate term, the volatility in the markets is bound to increase as uncertainty over the ‘divorce proceedings’ and the evident political fractures spreads. The sharp drop in the value of the pound was to be expected as markets had not 'priced-in' the impact of the potential Brexit. The world markets will now have to undergo a period of ‘correction’ in the face of evidence. Particularly, the fall of the pound against the dollar reflects the relative attractiveness of the US economy now compared to the UK after Brexit. The reassurances from the Bank of England and the corrections in financial markets should reduce this initial bout of volatility.

Nevertheless, the medium term expectation is that the value of UK companies will suffer, particularly those in the banking sector and those exposed to currency risk. The pound will remain weaker relative to the dollar raising the cost of imports and potentially triggering inflation in the medium term, limiting the Bank of England's ability to cut interest rates. All these factors will are likely to reduce investment in the UK in the medium term and limit UK growth.

In terms of the long-run impact on the economy, the economists on the Leave campaign argued that Brexit meant taking advantage of free trade with the rest of the world with our open, dynamic economy. They argued that leaving will allow the removal of trade distortions, open up non-EU immigration and increase trade and investment flows, particularly into sectors unprotected by the EU, such as services. Our own fear is that life outside the EU will reveal the uncompetitiveness of certain sectors like agriculture and manufacturing which will lead to increased demands on the government for protectionist measures, state intervention and subsidies. The resulting lower trade and investment flows (and potential capital outflows) with the reduced labour mobility would further depress economic growth.