The Price of Brexit–An Economic Slump

July 20, 2016

The Price of Brexit–An Economic Slump

by The Editorial Board

It was always clear that Britain’s divorce from the European Union would be painful and costly. Nearly a month after the country’s ill-advised referendum on union membership, it is becoming clear just how bad it will be.

The British economy will slow noticeably this year and in 2017, the International Monetary Fund and the European Commission, the union’s executive arm, said in separate reports released on Tuesday. The IMF now expects 1.7 percent growth for 2016, down from its April forecast of 1.9 percent. It predicted a drop to 1.3 percent for 2017, almost a full point below its earlier forecast of 2.2 percent. The chief economist of the fund, Maurice Obstfeld, said that growth could be much lower if negotiations between Britain and its European partners drag on or become contentious.

The European Commission is even more pessimistic. It says Britain’s economy could shrink 0.3 percent next year under its “severe” scenario. Both bodies also warned that the uncertainty caused by Brexit will slow growth in the rest of Europe. The IMF lowered its forecasts modestly for global growth in 2016 and 2017.

British and European leaders need to take these forecasts seriously as they negotiate how to remove Britain from the union and structure a new economic relationship. Britain trades extensively with the E.U., and London is the biggest financial hub in the union. Economists say a disruptive breakup would be bad for everybody, leading to job losses and a spike in the prices in Britain of basic necessities like food that it imports from Europe. The pound has already fallen about 11 percent against the dollar and 9 percent against the euro since the referendum, raising prices in Britain for imports of goods and services.

It is clear that British politicians, especially those who campaigned the loudest for Brexit, did not prepare for this eventuality. Now, it is up to Prime Minister Theresa May, who took office just last week, and her new team to come up with a strategy to minimize the economic damage. Perhaps the best outcome Britain could hope for is an arrangement similar to the one Norway has with the E.U. It is not a member of the union but has access to the European common market and agrees to abide by its regulations and to allow free movement of Europeans across its borders.

So far, Ms. May appears to be wisely ignoring calls by some anti-E.U. politicians to quickly start the formal process of leaving the union by invoking Article 50 of the Lisbon Treaty. British officials recently said they would not invoke the article this year.

But a long delay would carry risks, too, by increasing uncertainty, which would depress business investment and consumer spending. What is clear is that Britain now finds itself in a no-win position.


12 thoughts on “The Price of Brexit–An Economic Slump

  1. There are no right or wrong answers. Impact of Brexit will probably be only known 10 years down the road. Decision has been made and it is now up to the leaders to follow-up and follow through. And do not wait for 40 years if you need to reverse decision.

  2. This sorry episode truly illustrates how crucially important is your one vote in a functioning democracy.

    Let this be a lesson to the good people of Great Britain and the rest of the free World.

    As an English saying goes, no use crying over split milk, and therefore my admiration and all the best wishes to PM Theresa May who have the courage and gumption to so quickly step forward in her nation’s hour of need wearing, appropriately, leopard patterned shoes to kill off all feelings of national negativity and bring about another “Finest Hour” for her nation which, viewed objectively, has contributed much to the rest of the World. Give credit where it is due.

  3. Interesting that the quotes are only from the IMF and the European Commission… which can hardly be expected to have more mature views.

    The debate is too long for such a blog entry… but just one fact will suffice… the Sixties was when the UK was perhaps the centre of the world… in manufacturing, in its traditional industries (fishing, mining etc) and above all the arts… it was, after all, the Swinging Sixties when everyone who was anyone wanted to be in the UK and especially in the centre of the mod-fashion scene…Carnaby Street

    Then it latched on to Europe and disaster after disaster followed…first in fishing followed closely by the other industries.

    The UK has the capacity to bounce back much stronger and more quickly than many imagine… which makes such articles nothing more than wishful thinking and fear-mongering.

    It has taken the British four decades to wake up to the deception and lies of people like Edward Heath… in BREXIT they stand not only to regain their independence but to save Europe and the World…

  4. Quoting what are said by divorced spouse about you is not instructive at all. This is common sense, something editorial board from NYT is found severely lacking.

  5. @shrey: Central Bank’s 2% target is in relation to unemployment rate, and economic state of the world.

    The idea is to get better employment rate, in light of US not controlling its’ exchange rate. Not controlling its’ exchange rate, Central Bank has to figure out current state of the world, and not just of the US, in anticipation of economic state of the world.
    To push it to 4%, something might have to give. For e.g. tightening the money supply through various mechanism. When money tightens, employment rate might be impacted.

    Fed has some paper on this.
    // Why does the Federal Reserve aim for 2 percent inflation over time?
    // The Federal Open Market Committee (FOMC) judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve’s mandate for price stability and maximum employment. Over time, a higher inflation rate would reduce the public’s ability to make accurate longer-term economic and financial decisions. On the other hand, a lower inflation rate would be associated with an elevated probability of falling into deflation, which means prices and perhaps wages, on average, are falling–a phenomenon associated with very weak economic conditions. Having at least a small level of inflation makes it less likely that the economy will experience harmful deflation if economic conditions weaken. The FOMC implements monetary policy to help maintain an inflation rate of 2 percent over the medium term.

    It is scary to think a 16 year old started thinking about these things.
    I would like to think about Pokemon Go, as a 40 year old! 😛

  6. I bebeliev BRIEXIT is an economic hick- up , a temporary traffic stump.
    With it new opportunities aplenty are created. There are new challenges. It would be overcome.

    Britain system and institutions are strong,clean and established. Human resources are competent and capable. Britain would emerge wealthier and stronger.

  7. What a load of horse manure! Did they just pull the figures out of the magician’s hat? Spewing doom and gloom and negative projections to create bad market sentiment is nothing new coming out from the International Mother Fakirs.

    EU is going to implode anyway, only sooner after Brexit. The E.U. was meant to be a single economic entity but the evil Troika in Brussels tried to turn it into political union through the back door.

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