7 Economic Consequences To Expect Post-Brexit

The political and economic consequences of the U.K. leaving Europe has Gordon Pape asking, after Brexit, now what?

In the days immediately following Britain’s decision to leave the European Union, stock markets around the world lost an estimated US$3 trillion in value and the pound sterling fell to a 30-year low. Britain lost its highly valued triple-A credit rating, the yield on European bonds fell to its lowest level in living memory, and safe-haven investors drove up the price of gold by almost $60 in one day.

The markets stabilized a few days after the June 23 vote, but the message had been sent: Brexit was a terrible decision. It will plague the British economy for years to come, depressing trade, raising unemployment levels and promoting a flight of capital to the continent.

This is a slow-motion withdrawal, which will take years to play out. The actual separation talks won’t even start until Britain triggers Article 50, the European Community’s withdrawal clause. From that point, talks could take up to two years. This means the consequences for Britain will unfold slowly, but they are coming and they won’t be pleasant.

1. A slowdown in Britain

The effect on Britain’s GDP is already being felt as foreign capital investment dries up in the face of uncertainty over where the country is going. Shortly after the referendum result was announced, Royal Bank slashed Britain’s projected growth rate for this year to 1.4 per cent (from 1.8) and predicted no growth at all in 2017 (down from 1.8 per cent). A recession in 2017 is not out of the question.

2. Impact on Canada

In trade terms, our risk level is low. Over the years, there have been several attempts to increase our trade with the U.K. and reduce our dependence on the U.S., but they have never gone very far. Only three per cent of our trade is with Britain compared to about 76 per cent with the U.S.

Despite the minimal impact on trade, TD Bank said in a note to clients after the vote that the spillover effect on investor confidence and business investment could knock between 0.5 per cent and 1 per cent off its predicted GDP growth rates for Canada and the U.S. in the second half of the year.

4. Threat to free trade

The vote was a body blow to free trade, delivered by a nation that conceived and profited from it for centuries. Now the concern is whether it’s an isolated case or the start of a contagion. Anti-trade forces are on the rise, led by Donald Trump who wants to tear up most U.S. deals, including NAFTA, and derail those in the making, like the Trans-Pacific Partnership. All this would pose a serious threat to the Canadian economy.

In 1930, the U.S. enacted the Smoot-Hawley Act, which was designed to protect American jobs and industries from foreign competition by dramatically raising tariffs. It was a disaster. According to the U.S. State Department, global trade dropped by 66 per cent between 1929 and 1934. Hundreds of thousands of American jobs were lost, exacerbating the Depression. World trade did not recover until after the Second World War. Trump seems to be headed down that same road, and Brexit may give his campaign a boost.

5. Break-up of Britain

The “United” Kingdom may not be that way much longer. Scotland, which voted overwhelmingly for the Remain side, has made it clear it wants to stay in the EU, even if that means another divisive referendum on its independence. There have also been rumblings from Northern Ireland for independence or union with the Irish Republic. A constitutional crisis and the break-up of the U.K. could be next.

6. Boost for the far right

Political parties that a few years ago were considered to be on the lunatic fringe have been gaining strength recently, and the Brexit vote may accelerate this trend in both Europe and the U.S. These parties reflect voter antipathy to immigration, elitism, income inequality and free trade, all of which have become fertile ground for the politics of fear and division.