In Depth

Will Brexit Britain endure an economic recession?

Surveys suggest impact of vote was less severe than feared – but is the true reckoning still to come?


There were many experts predicting dire consequences of a Leave victory before the 23 June referendum on the UK's membership of the European Union.

Bank of England governor Mark Carney, among others, suggested there could be a "technical" recession amid a slowdown in business investment prompted by the uncertainty a Brexit vote would unleash.

So are we heading for a recession – and what would it mean if we were?

What is a recession?

If overall growth is negative for two consecutive quarterly periods - so for half a year in total – then a country is said to be in recession.

This would be declared based on data available at the time, which is often preliminary and subject to a degree of estimation. Revisions as more concrete information becomes available can change things significantly, as when Britain's "double-dip" post-crisis recession was erased.

Why does it matter?

In simple terms, suffering an overall fall for one quarter shows activity has been slow. If it happens over two quarters then it indicates a more substantial problem.

Most of them time this coincides with people spending less, company profits falling, wage growth slowing, unemployment growing and generally less prosperity all round.

What was predicted?

Before the referendum, it was argued Brexit would slow down business investment, as companies would be reluctant to invest until they knew how our new trading relationship with Europe and the world would look.

Amid that turmoil, many said we'd see at least two quarters of negative growth – and as the uncertainty could persist for anything up to two years or more, this could become a prolonged slump.

The Institute of Fiscal Studies said that if the Treasury's forecasts were right, around £40bn of borrowing would be added to the government's debt pile, triggering more austerity.

Is this happening?

Not by a long chalk. Having seen a sharp drop in sentiment in July, most business surveys and economic estimates have bounced back as the economy has showed surprising resilience.

The Guardian notes that "the construction, manufacturing and services sector all grew faster than City economists had been expecting in September", according to the latest Purchasing Managers' Indices. They registered a composite reading of close to 54, where a score above 50 indicates expansion.

Moreover, says the paper, the "International Monetary Fund is predicting the UK will be the fastest growing of the G7 leading industrial countries this year, with growth of 1.8 per cent".

Why are things better?

There are a few reasons. Firstly, people have not stopped shopping – in August, we spent six per cent more than the year before, amid very warm weather.

That makes sense when you consider more than half of those who voted wanted to leave the EU and are unlikely to be cowed by the shock vote. Spending did level off in September, though, as unseasonably warm weather hit sales of Autumn clothing.

Added to that is the slump in the pound, which has fallen by almost a fifth against the dollar and more elsewhere. This has made UK exports more attractive and contributed to a strong showing from the manufacturing sector.

Thirdly, the Bank of England has unleashed some major stimulus by cutting interest rates to a new record low and injecting another £170bn into the economy.

Finally - nothing has happened yet. The new government has quickly restored political order (even if it is still to offer Brexit clarity) and talks with the EU are still to begin.

So the doom-mongers were wrong?

Let's not get ahead of ourselves.

The Organisation for Economic Co-operation and Development, for example, says things are much better in the short term and that a recession will probably be avoided. But it still predicts growth next year will be around half previous forecasts, says the Guardian.

We're not out of the woods yet, then?

Nope. We might not have the collapse some predicted, but it is early days and turbulence over the coming few years is inevitable.

For example, the Guardian says "more than half of chief financial officers polled by consultancy Deloitte expect to cut investment and hiring over the coming year, as they fret about the long-term consequences of Brexit."

Then there are the consequences of the fall in the pound for consumers: inflation surged to a two-year high of one per cent last month – and could hit three per cent next year. That will begin to hit real wages and could lead to shoppers spending less, which would hit growth.

What is the government doing?

Chancellor Philip Hammond has said he will relax the timetable to return the public finances to surplus, and is expected to inject some fiscal stimulus into the economy at his autumn statement next month.

He doesn’t want to abandon fiscal conservatism completely, however, and will be limited by how bad the public finances are already.

For the first month post-referendum, the government borrowed £2bn more than expected and a little more than last year - so the projected cut in borrowing for this year is already way off course. Giveaways could be limited.

What happens now?

Central is the issue of the single market: do we seek membership, can the cost of free movement be tolerated and if not what is the alternative?

If, at the end of this, the UK ends up with complex and costly tariff-restricted trading with the largest single market in the world, it will be bad news for the economy, especially the financial sector that relies on EU "passporting" rights.

It's this fear, perpetuated by hardline rhetoric from the government that it is prioritising cuts to immigration over all else, that has hit the pound so hard in the past month.


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