Fears of being worse off could increase public pressure for a second voteby Paul Wallace / September 28, 2018 / Leave a comment
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…