The Initial Economic Impact of Brexit: An Update to Early December 2016

On June 23, 2016, the United Kingdom’s vote to leave the European Union came amid widespread professional forecasts of financial volatility, a likely growth slowdown for the United Kingdom, and potential spillovers to the rest of the EU and even to countries outside the EU’s Single Market. After a relatively brief interlude of jitters, however, equity markets recovered and interbank stains were avoided (albeit with central bank support). The main durable financial market effect has been a substantial depreciation of the pound sterling. At the same time, economic signals from the U.K. economy have been mixed, with fairly robust consumer spending and exports sustaining the economy so far. The shape of the ultimate terms of trade between Britain and its former EU partners remains unclear, however, and the uncertainty seems likely to weigh on future investment and hiring. It is unlikely that substantial U.K. control over the free movement of EU persons across its borders—a main objective of the pro-Brexit campaign—will prove compatible with anything near full access to the Single Market. Moreover, any eventual loss of access to the Single Market, including for financial services, will very likely reduce the United Kingdom’s steady-state income.