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Why Brexit apocalypse has failed to materialise - Yet

15 September 2016, 17:56

London - The forecast of a Brexit apocalypse has so far failed to materialise. Britain's economy is coping better than expected after the nation voted to leave the EU, despite dire predictions of a recession.

The nation's EU exit vote in the June 23 referendum sent shockwaves across the world and sparked warnings from major institutions, including the Bank of England, that Britain would plunge into a painful economic downturn. Still, economists warn that the pain may yet come.

What is current state of play?

Britain's referendum delivered a severe shock. The London stock market tumbled amid worries about the overstretched real estate sector, while the pound slumped to a 31-year low against the dollar.

However, sterling has since stabilised, and London's FTSE 100 index of top blue-chip companies now sits above its June 23 level.

The economy has fared better than expected according to most official data. Consumer price inflation, retail sales and unemployment have proved resilient.

Manufacturing has been mixed: official figures showed activity slumped in July, but survey data has signalled a recovery in August.

In response to broadly upbeat data, investment banks Credit Suisse and Morgan Stanley upgraded their growth forecasts, scrapping their predictions for a recession -- or two straight quarters of shrinking output.

Why is the economy not buckling?

Many economists argue that post-Brexit pain has not yet been felt.

Britain remains a member of the European Union, for the time being, and still enjoys access to the EU's single market, while the slumped pound has not yet translated into rising prices.

"Nothing much has actually happened yet," said Scott Corfe, director of London-based think-tank the Centre for Economics and Business Research.

"The UK can still trade freely with the EU, meaning there are no negative impacts on exports.

"At the same time, consumers are still benefitting from low inflation and unemployment. It will take time for the sterling devaluation to feed through into higher consumer prices, so until then households are relatively insulated."

What is boosting the economy?

In August, the Bank of England slashed interest rates to a record low 0.25 percent and announced a vast stimulus package to combat economic fallout from Britain's looming EU exit. The BoE maintained its stimulative monetary stance on Thursday.

Adding to the picture, the rapid formation of Prime Minister Theresa May's new government, after the resignation of predecessor David Cameron, has helped matters. Finance Minister Philip Hammond will likely deliver fiscal stimulus in his budget update due November 23.

So is everything rosy?

Not quite. Britain appears set to avoid a recession any time soon, but economists are concerned about the longer-term impact.

The economy enjoyed a 0.6-percent expansion in the second quarter, following 0.4-percent growth in the previous three months -- but a slowdown is widely expected in the third quarter, or the three months through September.

"Any ... conclusion that life has returned to 'business as usual' may prove to be a mirage, at least in the longer term," cautioned Standard & Poor's Global Ratings in a recent report.

Economists also warn that the outlook is uncertain because British PM May has yet to trigger Article 50 of the EU's Lisbon Treaty, which will begin a two-year countdown to actual Brexit -- amid a race to secure trade deals.

What about after Brexit is final?

The country's desire to become a free trade leader following its vote to leave the EU is seen as wishful thinking by experts, who say London's hands are tied until a formal exit from the bloc.

The future relationship between Brussels and London, meanwhile, remains unclear.

With trade deals hanging in the balance, and uncertainty over single market access, Britain's position as a major world economy -- along with its future economic and employment growth -- is at stake.


IHS Global Insight



Tags uk brexit

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