The Current Economic Situation in the United Kingdom

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of the University of Birmingham

“Dire predictions about the economy in the aftermath of the Brexit referendum result do not seem to have been fulfilled. Reasons for this include the actions taken by the Bank of England, the depreciation of the currency and resilient consumer behaviour”  

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Dire predictions about the economy in the aftermath of the Brexit referendum result do not seem to have been fulfilled. Reasons for this include the actions taken by the Bank of England, the depreciation of the currency and resilient consumer behaviour. In addition, the quick replacement of David Cameron by Theresa May reduced the political uncertainty of the result.

But this does not mean we can be sanguine about the prospects for the economy over the next few years. It is difficult to escape the conclusion that the long-term consequences of Brexit will be harmful, and the anticipation of this will affect economic agents’ decisions now. Even if the UK reaches a free trade deal with the EU, this is far inferior to the current situation, since trading with the EU will require customs inspections and rules of origin documentation, which means a non-negligible increase in the cost of trading. The reduction in trade is likely to reduce productivity, and hence living standards. 

We would also expect a decline in investment, including foreign direct investment, and sluggish consumption, due in part to the effect of the depreciation on consumers’ disposable incomes. The effect of the depreciation on exports will help to some extent; however, there will be little scope for either monetary policy or fiscal policy to do much to offset the effects of any economic downturn. In particular, tax revenues are unlikely to be buoyant, and we can expect several more years of austerity. Things will not be pleasant over the next two or three years. 

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