The uncertainty of Brexit is now imposing a visible cost to the UK economy. The effect of uncertainty is different, of course, from the ultimate impact that the new arrangements will have. It is possible that some of those effects will be positive – and the markets and much business behaviour still assume remarkably little disruption to normal life. Yet the costs of exit will inevitably be apparent first.
This is an area, too, where economics cannot be separated from politics. The likelihood of an even more pronounced economic hit is great. If so, there is good reason to think that voters will take it out on the Conservative party – whether for holding the referendum, for the way Brexit has been managed, or out of a generalised sense of anger.
The chance of a Labour government led by Jeremy Corbyn, committed to overturning big planks of privatisation and sceptical of the role of markets, is far from zero. The impact of that could rival the impact of Brexit for many people, businesses and the economy overall.
First, the impact so far. Mark Carney, governor of the Bank of England, explained the decision to cut growth forecasts from 1.9% to 1.7% this year (and leave interest rates unchanged) by saying that uncertainty was restraining investment and household spending. In the first three months of 2017, the economy grew by just 0.2%, a sharp slowdown from the previous three quarters. Just under a year ago, the UK was growing faster than the US, Germany and Japan; now, it is the slowest of the G7 countries.
Second, inflation is rising, a consequence of the fall of sterling against currencies such as the dollar and euro in which the UK imports a lot of goods. Yet that has not yet produced a significant rise in exports. Meanwhile, given that wages are currently rising at less than inflation, this will put a squeeze on consumer spending, one of the engines of recent growth. Real wages had begun to recover in the past couple of years, after annual declines between 2007 and 2014. The pressure on income in real terms is also likely to stoke public resentment on many fronts: witness the rising opposition to “austerity”.
Other signs of nervousness are the slump in mortgage lending, and the parallel stalling of house prices. But the most significant implications for future growth are probably still anecdotal – from businesses musing on whether to invest or relocate in the EU. By spring 2018, it should be clear whether many will act on such plans – or not.
The impact of uncertainty should not be confused with the impact of Brexit itself. That will depend on the terms struck for access to the EU market and customs union, the terms of immigration for skilled and unskilled workers, and whether the “transition period” the Cabinet now appears to accept is needed does indeed avoid a “cliff edge” of sudden cessation of working arrangements. It will also depend on what trade deals the UK strikes with other countries, and any benefit from leaving the constraints of EU regulation.
We know none of these things; not only have the talks just started, but the Cabinet appears divided about its targets, and the prime minister’s preferred goal – leaving the single market and customs union but retaining many or all of the benefits – is not on offer from EU negotiators.
It would be wrong to dismiss the opportunities presented by Brexit. But the costs – of uncertainty, of transition, and very likely of the deal itself – are clearer and fall sooner. Businesses appear sanguine but may well be underestimating the risk. To that they should add the risk of a change of government, to one which would represent a very different philosophy from that of British governments of the past 30 years, adding another dimension of risk as well.