Britain's Economic Outlook after Brexit
| Published date | 01 June 2017 |
| Date | 01 June 2017 |
| DOI | http://doi.org/10.1111/1758-5899.12441 |
| Author | Linda Yueh |
Britain’s Economic Outlook after Brexit
Linda Yueh
Oxford University
Abstract
In a historic referendum, Britain has voted to leave the European Union. Some of the polling suggests that a backlash against
globalisation played a role, alongside themes such as sovereignty and immigration. The government has insisted that Britain
will maintain its global outlook, but how challenging will that be in the face of disengaging from the world’s biggest eco-
nomic entity and forging a novel path? The UK is doing so with some notable weaknesses in its large trade deficit. This article
explores the economic uncertainties of Brexit and potential ways forward.
Policy Implications
•Britain’s historic departure from the European Union raises a high degree of economic uncertainty about its future, which
will depend in part on new trade agreements negotiated both with the EU and also other major economies.
•The UK needs to agree on a new economic relationship with the EU, including how much importance to place on retain-
ing tariff-free access to the Single Market.
•To counteract any turning inward and to sustain its current growth rate, it is important that a Britain after Brexit maintain
its long-standing international orientation.
•Considering that free trade agreements are currently being negotiated worldwide, the UK should prioritise the task of
opening markets for British business.
In a historic referendum, Britain has voted to leave the Euro-
pean Union. Some of the polling suggests that a backlash
against globalisation played a role in what has been dubbed
Brexit, alongside issues such as sovereignty and immigra-
tion. The government has insisted that Britain will maintain
its global outlook, but how challenging will that be in the
face of disengaging from the world’s biggest economic
entity while forging a new path? The UK is doing so with
some notable weaknesses in its large trade deficit, which
has hit a record high after its 2008 financial crisis.
What does the economic future hold for Britain? Of
course, the dust has not yet settled, as there are a lot of
unknowns facing the first country to leave the European
Union. There is no question that the decisions to be taken
will involve re-defining Britain’s trade relationship not only
with the EU, but also with the rest of the world, for years to
come. This article explores the economic uncertainties of
Brexit and potential ways forward.
The economic impact of Brexit
Some hiring and investment decisions had been delayed
even before the vote on 23 June 2016; in fact, since Febru-
ary, when the announcement for the referendum on contin-
ued EU membership was made by the British government
(Economic Policy Uncertainty, 2016). Investors’expectation
of sterling volatility in the period before the referendum
was the highest since the 2008 financial crisis when the
entire banking system could have brought the economy
down. The market reaction reflected uncertainty about what
would happen to the pound, which dropped sharply, as pre-
dicted, after the UK voted to exit.
Investors apparently placed their money on just one out-
come –a hit to the economy, regardless of the referendum
results. That was reflected in gilt yields, that is, the interest
rate that the UK pays on its government bonds. Gilt yields
had fallen even before the vote took place. After the results
were in, yields on benchmark 10-year government debt fell
to record lows, as have those on 20-year and 30-year debt.
Bond yields reflect where markets expect interest rates to
be, which is affected by the Bank of England (BOE) base rate
and the state of the economy. And those are related. If the
economy is contracting or weak, the BOE would be
expected to cut rates. Indeed, that is what has happened as
the BOE cut interest rates just a couple of months after
Brexit to a record low 0.25 per cent. It’s the first time that
the central bank has cut rates and also extended quantita-
tive easing (QE) since the 2009 recession that followed the
banking crash. QE was not only revived, it was also
expanded as the BOE announced that for the first time it
would also purchase corporate debt as part of its
programme.
Conversely, bond yields are also influenced by the world
economy, which in turn affects Britain. The global outlook
does not look too rosy either. Worldwide, developed econo-
mies’government bond yields have dropped dramatically.
Slow growth and aggressive easing by central banks, along
with Brexit for the UK, are among the factors driving real
©2017 University of Durham and John Wiley & Sons, Ltd. Global Policy (2017) 8:Suppl.4 doi: 10.1111/1758-5899.12441
Global Policy Volume 8 . Supplement 4 . June 2017
54
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