Skip to main content

The Journal Gazette

Saturday, September 17, 2016 10:01 pm

After Brexit, could be calm before storm

DANICA KIRKA | Associated Press

LONDON – Fear of an economic meltdown was the biggest weapon in the campaign to stop Britain from leaving the European Union.

Economic and financial experts in the City of London, which has a lot to lose from an EU exit, warned that a decision to leave would hit business so hard as to put the country in or close to recession this year.

Ten weeks after the vote, though, some say the fearmongering was overdone. Although the pound has fallen to a 30-year low, as predicted, people continue to spend and activity in manufacturing and services rebounded last month from a sharp contraction in July. House prices have held up.

The question is whether this is simply the calm before the storm – before Britain goes through with the decision to leave the EU and negotiates its new relationship – or is the country such a good place to do business that it can weather the dislocation of Brexit.

"The City called it wrong," Nigel Wilson, chief executive of Legal & General, an insurer and pension provider that has $1 trillion under management, told the BBC this week. "Everyone was naturally a ‘Remainer’ and therefore when it didn’t happen, psychology took over and we got some very odd outcomes which are busily self-correcting over a period of time."

But Swati Dhingra, one of those who forecast severe damage to the economy, says the danger hasn’t past. Warnings about the impact of Brexit were focused on what might happen when Britain leaves the EU, and that won’t happen for more than two years – at least. Until then, no one knows what the country’s relationship with the EU will look like and what effect it will have on trade, labor supply and investment, she said.

"It’s too early to tell," said Dhingra, an expert on trade and international economics at the London School of Economics. "The trade policy changes have not yet happened. . Why are we expecting things to change?"

Among the most crucial questions to be decided is whether Britain will continue to have access to the EU’s single, tariff-less market of more than 500 million people and under what conditions. The financial services industry is particularly concerned about maintaining the current system of "passporting," which allows professionals who are registered in one member state to work anywhere in the bloc.

The details of Britain’s new relationship with the EU will be determined by negotiations that will last at least two years and won’t begin until the government formally notifies European authorities that it intends to leave. Prime Minister Theresa May has signaled that she won’t do this before 2017.

John Nelson, chairman of the insurance market known as Lloyd’s, suggested during a speech this week that big businesses are waiting to see what sort of deal the government will strike.

"If we are not able to access the single market, either through passporting rights or other means, the inevitable consequences for Lloyd’s – and indeed other insurance organizations – will be that we will transact the business onshore in the EU. And that obviously will have an impact on London," Nelson said at the Lloyd’s City Dinner.

One explanation for stabilization in economic indicators is that the Conservative Party chose a new prime minister two months earlier than was expected when David Cameron stepped down following the referendum. Since taking office, May has dismissed calls for early parliamentary elections and, critically, insisted that she won’t immediately trigger Article 50, the clause in the EU treaty that sets a departure in motion.

"We are really relying on crumbs," said Alpesh Paleja, principal economist at the Confederation of British Industry about the dearth of data. "I think it’s very difficult to tell how much of a storm it is going to be because so much depends on a competent hand on the part of the government in handling Brexit."