'Brexit means Brexit' means what?

12 December 2016 | Markets and Economy


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Leo Schulz (senior writer, Vanguard Asset Management): 'Brexit means Brexit' means what? The UK seems to have taken one of the most momentous decisions in its long history. Peter, what's going to happen now?

Peter Westaway (chief economist, Vanguard Europe): Well I think the simplest answer to that question is that we don't know. What we know for sure is that there's a lot of uncertainty. And probably one useful way to think about the question is by breaking down the possible effects into the long run and the short run. So first of all, let's think about the long-run economic consequences on UK activity.

This chart here shows a range of estimates that were provided by economists in advance of the vote. And what they show is that with the exception of one study, all the rest show that the predicted outcome was going to be negative for UK GDP. And those ranges went all the way down to 10% to 15% of GDP – so, quite large. But not only is there uncertainty across the different studies, each of the individual studies themselves give a range of uncertainty. And that's because we don't know at the moment whether or not the UK is going to have what's called a 'hard Brexit' or a 'soft Brexit'.

Leo Schulz: So that's some of the longer-term outlook. Alexis, in terms of the short-run outlook, things really haven't been quite as bad as people have feared. That's right, isn't it?

Alexis Gray (Vanguard economist): I mean, I think that's right so far. We've had obviously several months since the Leave vote. And so when we think about the short run – we're thinking of the first two to three years. And in large part I would say that's how do firms and households respond to the idea that we have voted to leave the [European] Union but haven't actually left yet? And so what we can see here is similarly a set of estimates across various economists the estimated impact over two to three years, which is smaller than what we saw on the previous chart. Now based on what we've seen so far since the vote, I think the impact has not been as bad as we suspected. So we estimate something of 2% to 3%, that's Vanguard, so probably not as bad as the idea of a severe recession.

Leo Schulz: Peter, the Bank of England – we saw quite a strong response to the Brexit vote from the Bank of England. Where's the Bank going to go now?

Peter Westaway: Well I think at the time that they made that initial reaction, that was back in August when some of the survey-based data was very downbeat, as Alexis was alluding to, but I think since then things have turned out not quite so bad. We've had that policy response. And because sterling has fallen so sharply actually the Bank of England is starting to worry a little bit more about inflation. And so I think now the risks are quite balanced. I don't think we'll necessarily see more interest rate cuts, but we're not really going to see interest rates moving up any time soon. So I think we're going to see low interest rates for the foreseeable future in the United Kingdom.

Leo Schulz: Brexit, a big decision, but it will be a long while before the effects are fully apparent. In the meantime, low interest rates and the risk of economic contraction. Peter Westaway, Alexis Gray, thank you both very much.

Alexis Gray: Thank you.

Peter Westaway: Thank you.

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