The UK economy went through a lot in 2016 thanks, in the most part, to the unexpected outcome of the June 23rd EU Referendum. To the surprise of many, a majority of the UK’s citizens voted to leave the EU after being part of the group for over 40 years.
The EU Referendum inspired the creation of a new word to dominate headlines, ‘Brexit’, and unleashed a wave of uncertainty about just how Brexit would work, and what it might mean for those living in the UK and in Europe.
In this article, we’ll take a look at the immediate aftermath of the ‘Leave’ vote on the UK economy, how the UK has fared six months down the line, and what 2017 might hold for the Pound, the UK and the national economy as Brexit begins in earnest.
The first casualty of the ‘Leave’ vote on June 23rd was the Pound itself, which fell dramatically against key rivals like the Euro and the US Dollar.
Although Sterling peaked on the night of the vote due to hopes that ‘Remain’ would take the majority, the morning of the 24th saw a sharp drop in both pairings. Against the Euro, the Pound lurched down from 1.30 to 1.23, while against the US Dollar an equally precipitous dive from 1.49 to 1.36 was seen.
This heavy devaluation of the Pound in the space of hours led into a longer term issue for the UK – with Sterling weaker, the cost of importing into the UK rose.
As such, a number of business operating in the UK announced that they would be raising prices or modifying their products to incorporate these challenging new financial conditions.
Two of the most dramatic signs of how Brexit was impacting consumers concerned Apple and Unilever; in the former case, the cost of Mac models in the UK was increased by hundreds of Pounds in response to the new economic environment created by the UK’s exit vote.
In the latter case, the brief but memorable ‘Marmitegate’ controversy erupted, where Marmite-producer Unilever got embroiled in a row with Tesco about hiking the price of the yeast-based spread after Brexit.
While ultimately a storm in a teacup, the incident did serve to highlight how rising inflation and a weak Pound could cause problems moving ahead.
Before the Referendum, a number of institutions had predicted that the UK could enter recession if it left the EU, including the Bank of England (BoE).
While the pre-Referendum period had seen years of guessing when the BoE could raise the UK interest rate again, the central bank actually ended up cutting the rate in August from 0.5% to 0.25%, the lowest rate in its history.
As well as the Pound tumbling because of fears about the future, the vote for Brexit also caused the UK’s services and manufacturing purchasing managers indexes (PMIs) to fall into contraction; the construction sector was already in this state and remained so because of Brexit-based concerns.
All of the uncertainty floating around at this time raised the fear that businesses in the UK could move overseas or stop investing in the nation; the Government notably secured continued Nissan activity after Brexit, but this story raised more questions than it answered.
After a busy 6 months for the UK, it’s worth taking a step back to see what kind of state the country is in, economically speaking.
Speaking broadly, the UK has been somewhat stable since the momentous vote last year; the country has not plunged into recession and international businesses continue to operate in the country, while UK companies that trade with the EU have remained open instead of shutting in droves.
When it comes to exchange rates, however, the Pound has continued to worsen overall since June 24th, falling against the Euro from 1.23 to 1.17 and against the US Dollar from 1.36 to 1.22. While a few upwards bursts have been recorded against both rivals, the general pattern has been a weakening of GBP as time has gone on.
The spectre of inflation still hangs over the UK economy, unfortunately, with the price of fuel being partly boosted by Brexit up to the highest level since July 2015.
On the plus side, the UK’s PMIs have undergone a more positive transformation, with construction, services and manufacturing all bouncing back and rising strongly out of contraction. December’s services result has been particularly supportive, with the fastest rate of growth in 17 months being recorded.
As it stands on the political side, the Government currently remains in a state of restlessness, as the Brexit ball cannot get properly rolling until Article 50 is triggered.
Just what stance UK negotiators should take on Brexit with EU officials doesn’t seem to have been decided yet; as well as ‘Hard’, ‘Soft’, ‘Messy’ and ‘Smooth’ Brexit options being on the table, Prime Minister Theresa May proposed in December that the UK has an undefined ‘Red, White and Blue Brexit’.
The diagnosis for the UK, then, is that voting for Brexit has not crippled the UK economy, nor has it triggered an immediate renaissance among industry and attitudes as the nation contemplates its eventual divorce from the multinational union across the Channel.
With that in mind, it’s time to look forward to what promises to be a historic year for the UK, as it takes its first proper steps into the unknown and begins to leave the EU in earnest.
Ever since the day after the vote, economists have been hard at work forecasting how the UK economy could change in 2017. While these predictions are only educated guesses at present, they are nonetheless worth watching due to the high levels of volatility and variability that the Referendum has generated.
Starting right from the top, Bank of England (BoE) estimates are for slowing growth in 2017, along with rising unemployment and a potentially troublesome rise in inflation far beyond the 2% target; this opinion has been echoed by BoE official Andy Haldane.
Inflation remains an issue moving ahead, as if the UK’s glacial pace of wage growth fails to rise in tandem with increasing inflation, consumer spending will suffer.
Sticking with the BoE, the future actions of the central bank are a bit of a mystery. Commenting on the supportive December services PMI result, Markit Chief Business Economist Chris Williamson has stated that;
‘At face value, this [services] improvement suggests that the next move by the Bank of England is more likely to be a rate hike than a cut, but policymakers are clearly concerned about the extent to which Brexit-related uncertainty could slow growth this year. Any change in policy therefore looks unlikely in the short term, and the next move […] could as much be a rate cut as a hike.”
When it comes to the essentials, food and fuel prices are expected to continue an upward trajectory this year, while in the bigger picture, the more immediate question remains about whether established banks in the City of London might start upping sticks and moving to the continent.
A major Government action to watch out for in the near-term will be the actual triggering of Article 50, which is expected to occur by March 31st at the latest.
The Government is currently waiting on a Supreme Court appeal to try and reclaim authority over triggering the all-important legislation without Parliamentary approval; this result is expected to arrive in January.
When Article 50 finally is triggered, the Pound is expected to drop against the Euro and US Dollar heavily, although the damage is likely to be lessened if the Government pursues a ‘Soft Brexit’, which aims to keep single market access.
The first official measure of how the UK has weathered the Referendum will come on March 8th, when the Spring Budget is announced and we are given a glimpse of how the Government plans to cope with the increased uncertainty caused by Brexit proceedings.
We hope that you’ve found this an informative catch-up on how Brexit has impacted and continues to impact the UK. If you want more detailed looks at how the Pound is doing against its peers, just check our currency news!
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