Almost two weeks after Britain decided to leave the European Union, the country is feeling the financial effects of a period of intense political uncertainty. Markets remain turbulent with banks, housebuilders and REITs under pressure and the pound has been on a downward slope, hitting new 31-year lows against the dollar.
As analysts try to make sense of what Brexit means for the UK, Real Views asks Andrew Burrell, Head of Economics & Forecasting, EMEA, at JLL, for his perspective on how the UK economy is facing up to the challenges of Brexit.
How do you expect the UK economy to play out in the coming months?
It will be a month or more before any post-vote economic figures appear, so any views are still largely based on judgement not hard data but the UK economy is well placed to face the Brexit challenge.
A post-vote update by Oxford Economics indicates that the UK economy will slow this year and next, but this deceleration is modest and followed by a recovery over the longer term. This is broadly in line with our thinking for a number of reasons. The most important is that, while the current uncertainty brings risks, the UK economy is in better shape than in the past.
We should not be complacent, as we are in unchartered territory. But if there is also progress in reducing political uncertainty and providing the direction for the UK’s future outside the EU then the economic outlook could look much brighter in a few months’ time.
What is the Government doing to bolster the UK economy?
The Government is being proactive with fiscal policy. Chancellor Osborne has discretely shelved his surplus target and threats of more austerity to announce a five-point support plan. This includes a cut in the corporate tax rates from 20 percent to 15 percent, which would make it one of the lowest in the developed world.
How are decisions by the Bank of England supporting the Brexit economy?
Policy is ready to support the UK’s solid fundamentals. In previous cycles, moves in interest often exacerbated problems when the economy slowed, most notably during the early 1990s. The monetary response to the Global Financial Crisis (GFC) learnt from these errors and rates were swiftly cut to near zero. Aside an isolated US hike last year, this ultra-loose bias has remained, despite a recovery in growth.
Bank of England Governor Mark Carney has pledged further support for the UK economy since the vote. Extra liquidity has been made available and we are surely only days away from the first cut in UK interest rates in seven years. Carney also hinted at a resumption of Quantitative Easing, potentially adding to the £375 billion post-GFC stimulus for the first time since 2012.
How has the UK economy changed since the Global Financial Crisis?
The GFC was the deepest slump on record, as a long global borrowing spree ended with the near collapse of the developed world’s financial sector. In 2009, UK GDP contracted by almost 5 percent and over a half a million jobs were lost – many feel that we have yet to fully recover from this shock.
But the UK economy is considerably less vulnerable now after a prolonged adjustment in balance sheets. Households have reduced their debts to more sustainable levels. Recapitalised domestic banks are now in far better shape following several years of consolidation. The Government developed a huge deficit as a result of the bail-outs and the recession, but several years of austerity have brought this back under control too.
Is Brexit a global crisis?
The Brexit shock impacts the UK economy disproportionately. Previously downturns have almost always been co-ordinated globally and this has reinforced their severity. This time, greater resilience in U.S. and European demand should help reduce negative feedback to the UK through trade and financial linkages. In addition, the sharp fall in sterling post-vote provides another safety valve by making UK investments and exports more affordable.