The fall in the pound following the European Union’s rebuff to Theresa May in Salzburg was an early warning that the markets will be giving a running commentary on the endgame of the Brexit negotiations. There will be more signs of economic trouble ahead if the talks between Britain and the EU collapse in acrimony or if the Westminster parliament rejects any deal that the prime minister eventually secures. Could public worries about the economy this autumn feed back into politics and increase the chances of a second vote on leaving the EU?
The effect of Brexit on the economy has been a slow burn. Even though the pound sank on the day after the referendum in June 2016, the economy initially shrugged off the result. Britain dodged the immediate recession that George Osborne’s Treasury had forecast. Indeed, GDP growth actually picked up in the second half of 2016, expanding by a sprightly 0.7 percent in the final quarter.
However, that surge was short-lived and the economic damage already inflicted by the Brexit vote has gradually become more and more evident. The economy slowed last year even as global growth picked up. Britain has slipped down the growth rankings among the G7 big economies. Before the referendum Britain had been at the head of the pack. Now it languishes near the bottom.
The slowdown has occurred even though a currency depreciation would normally stimulate growth by spurring higher exports and curbing imports. But the Brexit-induced fall in sterling reflected the judgment of the markets that Britain had embarked on a course of self-harm by making it harder to trade with the huge single market on its doorstep. At a stage in the economic cycle when businesses would usually have invested much more they have instead held back. More important, consumers have responded to the strain on household budgets from higher inflation by restricting their spending, which has slowed to a crawl.
A further fall in the pound would stoke yet higher inflation, which has risen since the referendum from just 0.5 per cent to 2.7 per cent, mainly owing to the fall in sterling. The public is increasingly pessimistic about the outlook for prices. A recent poll by YouGov for the American bank Citigroup showed that both short- and long-term inflation expectations had risen to their highest for five years. The public now anticipates inflation of 2.9 per cent over the next 12 months, gloomier than the Bank of England’s 2.2 per cent forecast. And people’s long-term expectation (for annual inflation in five-to-ten years’ time) has risen to 3.4 per cent.
“Economic consequences are critical in influencing former Leave voters to change their minds”At present a sudden slip into recession is unlikely since GDP growth picked up from 0.1 per cent in the first quarter of 2018 to 0.4 per cent in the second quarter. Furthermore, the third quarter began brightly with a strong performance in July, helped by the warm weather. The most recent forecasts compiled by the Treasury in September envisage the economy trundling along, with GDP growing by 0.4 per cent in the third quarter and 0.3 per cent in the fourth.
Yet, as the chances of a no deal Brexit increase, concern about the outlook for growth and jobs seems sure to intensify. If nothing else, the government’s contingency plans for a no deal outcome are alerting people to the reality of just how much damage that would inflict on the firms that employ them. Bleak warnings from businesses such as car manufacturers about the impact of a no deal Brexit are adding to the gloom.
Worries about the economy will be crucial in swaying public opinion. Since the referendum a big swing towards Remain has been elusive. Even so, recent analysis by psephologist John Curtice of polling in June and early July (almost all before the Chequers plan of 6thJuly) by NatCen, which has been tracking attitudes to Brexit since the referendum, put Remain at 54 per cent if another one were held.
A more important finding was that concerns about the economic consequences of Brexit are critical in influencing former Leave voters to change their minds. They outweigh for example judgments about whether any deal May might finally reach with the EU is good or bad, since voters are as likely to blame the EU as the British government for a poor deal. As Curtice concludes, “nothing is more likely to persuade someone who voted Leave in 2016 that perhaps they made the wrong choice than the perception that the UK economy will suffer as a result of Brexit.”
No one knows at this stage what the final outcome of Brexit will be. There are simply too many moving political parts, within the EU and at Westminster. But one crucial influence will be public opinion about the economy. Voters disregarded warnings about the adverse impact of Brexit in June 2016. Having experienced a big squeeze on living standards since the vote, they may be less dismissive now. If as a result polls this autumn reveal a further swing away from the narrow majority that backed leaving the EU two years ago, that will in turn increase the pressure on MPs to resolve the matter through another referendum.
