How is the EU Referendum Already Affecting the British Economy?
Much of the discussion around the economic impacts of the referendum has focused on the likely consequences of a ‘leave’ vote. But the upcoming vote has already had an effect on the British economy. A Chatham House international economics expert explains the impacts so far.
After a prolonged hangover from the financial crisis of 2008–2009, business confidence indicators recovered significantly in 2013. However, since the referendum was confirmed after the 2015 general election (marked in red), business confidence in the service sector has declined noticeably.
The same can be seen in manufacturing industries, where uncertainty over the outcome of the referendum has notably affected export orders. The net percentage of firms that have increased their manufacturing export orders has fallen almost to zero, the lowest figure since 2009.
Uncertainty is also visible in cutbacks to investment, particularly in the growth of fixed capital formation (investment in land, machinery, technology etc). This reached a post-crisis high in mid-2014, but has declined steadily throughout 2015 to only 1.1% quarterly growth by Q1 2016.
The exchange rate is another highly visible channel where the referendum has already affected the economy. The pound has declined from $1.54 at the time of the general election to a low of $1.38 in February and has remained below $1.50 for the duration of 2016 so far — the longest continuous period since 2002.
What next?
These trends likely reflect caution on the part of businesses and investors in the face of uncertainty. If the vote is to leave, it is likely that these trends will be exacerbated, as the uncertainty of Brexit would be likely to continue for several years. But even if the vote is to remain, it is unclear whether export orders and capital formation will ‘bounce back’ to pre-referendum levels or if these declines represent a permanent loss.
