Uncategorised / Brexit: A Leap into the Dark
Brexit: A Leap into the Dark
Posted: 29th Jun 2016
by Rory McGimpsey
The unthinkable has happened. The United Kingdom has voted by a clear, albeit narrow margin, to leave the European Union. After weeks of impassioned debate that’s seen a huge divide in public opinion, Thursday’s vote has delivered the outcome no one on officialdom really wanted. Prior to the crucial referendum, a litany of business leaders and economists had warned of the dire consequences if the UK ended its 43-year membership of the EU. Influential leaders from the world of business and finance queued up to tell us that quitting the EU would create a potentially catastrophic and destabilising shock to an economy still in tentative recovery from the worst recession in living memory. And yet the warnings weren’t heeded. Rather, we have leapt into the dark.
With so much of the debate descending into hysteria, it’s difficult to separate fact from fiction. We all understand that Brexit will have some effect, but what does it mean for the ordinary person? What difficulties, if any, will the decision cause for our own finances and budgets. By cutting through some of the myths, we can identify some early trends. In a time of such uncertainty, it’s important to provide clarity in the midst of so much confusion. While the long-term consequences of Brexit are more difficult to discern (after all the UK is not expected to formally leave for another two years), the short-term effects are easier to identify.
For example, the immediate aftermath of Thursday’s vote saw the pound plummet to a 31-year low on the currency markets. In addition, millions were wiped off the value of our shares as financial markets and investors reeled from the shock of a crisis they hadn’t expected. We have also seen a downgrading in the UK’s credit rating with the agencies Standard and Poor and Fitch, in the last few days. In this context, bond yields are also set to drop as investors adopt a more conservative approach. Most investors had predicted a victory for Remain and had tailored their investments accordingly. It’s easy to understand, therefore, why so many banks, businesses and financial institutions supported the retention of the status quo. A more obvious effect of the vote is a possible slowdown in the housing market. However, such correction isn’t necessarily negative and will be welcomed in cities like London where it’s virtually impossible for first-time buyers to get on the housing ladder.
In the longer term, we’ll have to wait and see how Brexit affects our lives. Certainly the decision carries the potential for instability in the global economy at a time when the growth of the US and China has stalled. Much will depend on the political negotiations that follow. Can Britain’s politicians find a way to retain some sort of access to the single European market, while absolving the UK from restrictions in relation to free movement? Time will tell. There’s an awful lot at stake. We’re entering a time of deep uncertainty. The climate of doubt is compounded by the fact that many of the promises on which people voted are starting to unravel. For instance, the claim by the Leave campaign that UK taxpayers will save £350m a week by Brexit has been openly questioned. In reality, the savings are expected to be more modest. As the FT reveals in its thorough summation of the potential impact of Brexit: “Economists overwhelmingly think leaving the EU is bad for the UK economy.”
What about the impact for those living with debt? It’s too early to say for sure, but the Brexit vote has created consumer uncertainty and confusion just when the economy was starting to pick up. The Independent has identified four possible ways in which Brexit may hit your pocket.
Firstly, in terms of inflation, the falling pound could see a rise in the cost of consumer goods, from petrol and cars to food and clothes. And as has been widely predicted, holidays in European resorts aren’t likely to get any cheaper as a result of this change! Brexit could also threaten employment and growth. For example, industrial and business costs could rise, a real risk for those companies who rely on importing goods.
On a wider level, Brexit may have an effect on economic investment, with employers becoming more risk averse. Many are predicting that economic growth will be curtailed on the back of last week’s vote. What such a slowdown means for wages and jobs remains to be seen. There’s also the possibility that beleaguered savers will face an even tougher time due to stock market unpredictability and turmoil. Finally, the big unknown is how Brexit will affect our mortgages. Rates have been consistently low since 2008, but post-Brexit there’s no guarantee the de facto freeze will continue. Although savers will welcome a rates hike, millions of homeowners will struggle if rates increase significantly.
While it’s unclear how Brexit will affect us, therefore, no-one is totally immune from its effects. An interesting time awaits. There’s much for politicians to ponder. Here’s hoping our leaders can steady the ship. Otherwise, we could all be heading for some choppy waters.