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Brexit blog: UK economy well placed to face the Brexit challenge


​​Few of us can have experienced a day quite like Friday 24 June 2016. While the turmoil continues, shell-shocked analysts have now had over a week to absorb the consequences and try to make sense of what Brexit means for the economy.

It is still very early days and market evidence has been mixed, with sterling depreciating sharply, but UK equity markets rebounding after an initial stumble. 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.

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.

Memories of the Global Financial Crisis (GFC) are still fresh in many people's minds. This 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% 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.

Policy is also ready to support these 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 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 £375bn post-GFC stimulus for the first time since 2012.

The government is also 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% to 15%, which would make it one of the lowest in the developed world.

Another cushion is the nature of the Brexit shock, which 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 US 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.

In our view, a significant economic slowdown in the UK can still be avoided given the solid fundamentals and accommodating policy. We should not be complacent, as we are in uncharted 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.