Brexit was supposed to mean economic Armageddon according to some Remainers. The GDP growth rate was supposed to fall, unemployment was destined to rise and the UK property, stock market and gilt markets were meant to deteriorate to an extent never seen before.
Even the Bank of England said in the aftermath of the vote that unemployment would spike to 5.6% and GDP growth would be much lower than expected. However, the Bank of England has now softened its stance and upgraded its forecasts for GDP growth in 2017.
Similarly, many of the Leavers have also been proved wrong. They expected the UK to endure a challenging short-term outlook but felt that it would be worth it for the long-term gains that Brexit would bring. They believed that a period of great uncertainty in the short run could mean reduced consumer spending and a wider economic shock, but that over time the UK economy would become leaner, more nimble and more productive.
Was everyone wrong?
Over four months on from the EU referendum and it seems as though everybody was wrong. Brexit hasn’t caused the short term pain that was anticipated by some Remainers. Similarly, the long-term outlook remains uncertain, proving some Leavers wrong.
The reality is that Brexit has contributed to a fall in the value of the pound. However, even this hasn’t been entirely caused by that single factor. The Bank of England’s decision to cut interest rates may end up being viewed as a hasty decision at best, since it has contributed to a weaker currency. The result of a weaker pound could be higher inflation, although the problems associated with higher inflation may be overplayed.
Inflation currently stands at just 1%. By historic standards this is low. Looking ahead, it’s forecast to rise to 2.8% in 2018, which is still only 80 basis points higher than the Bank of England’s long-term target. Certainly, higher inflation could mean disposable incomes fall in real terms and consumer confidence could take a hit. However, compared to crises in the past such as double-digit inflation in the 1990s, inflation below 3% wouldn’ be a major problem.
Therefore, it seems as though Brexit may not cause severe difficulties for the UK economy. In fact, it could be argued that its impact is rather minimal. Certainly, as negotiations with the EU begin and the UK goes it alone, confidence among investors towards the UK economy may be lower than it otherwise would have been. But the reality is that new problems and new challenges are likely to come along that could cause Brexit to eventually become a side issue that no longer makes the headlines.
As such, little has changed since the EU referendum and little may change regarding the UK’s economic outlook over the medium-to-long term. In that sense, both Remainers and Leavers could be wrong. And for investors taking a long-term view of the UK economy and its stock market, the best plan of action should be to continue to buy high quality companies at reasonable prices.
