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Few people expected Brexit to happen: analysts and investors indicated that the referendum would fail. Even Farage exhibited little optimism. The general public seemed to give off a different air, saying little in terms of which they intended to vote or at least not letting on in the polls that they were moving decidedly towards Brexit. In private, much of the public was supportive of leaving the EU but because of public tensions, including the murder of a PM by a crazed anti-EU Brit, much of the general public was tight-lipped—and so the results of the election surprised everyone.
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The financial markets acted panicky initially. Gold spiked; the pound dropped against the Euro (Bird, 2017). However, markets soon reassessed the situation and once the initial panic subsided, gold reversed and both European and U.S. markets improved; only Sterling remained weaker, post-Brexit (Nixon, 2017). In the UK, mining companies were the biggest winners, benefitting directly from the weaker pound. Real estate groups were among the biggest losers along with the building companies, banks, airlines and the FTSE 250 on the whole. However, a sense of the reaction being “overblown” was soon iterated by none other than billionaire investor Wilbur Ross....
While exchanges around the world shuddered at the outcome—Nasdaq fell more than 4%, Nikkei dropped 7%, and the German market fell by nearly as much—markets reversed order quickly enough and investors were soon “buying everything” by the week’s end (Cox, 2016).
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Short-term economic and financial consequences of Brexit are that the pound is likely to stay down and the viability of raising interest rates remains uncertain. Long-term consequences are that the UK will be able to exercise more autonomy over its own economy without being beholden to EU policies. It can arrange trade deals as it sees fit and should be much more strongly situated to pursue a Britain First policy. However, in order to attract investment, it must begin rate normalization—otherwise stagnation may result.
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The challenges that the UK economy faces as it negotiates and prepares for Brexit are trade deals with Europe, the US and other countries around the world. Rate increases from the BOE are likely to be warranted as England adjusts to being outside the EU. Rate increases in England, could signal a return to more conventional monetary policy by both the Fed and the ECB, should rate normalization not rattle markets too badly…
References
Bird, M. (2017). Can Sterling hit parity with the Euro? WSJ. Retrieved from
https://blogs.wsj.com/moneybeat/2017/08/16/can-sterling-hit-parity-with-the-euro/
Cox, J. (2016). A week after Brexit panic, investors are buying everything. CNBC.
Retrieved from https://www.cnbc.com/2016/07/01/a-week-after-brexit-panic-investors-are-buying-everything.html
Nixon, S. (2017). Markets risk shock if no Brexit deal is struck. WSJ. Retrieved from
https://www.wsj.com/articles/markets-risk-shock-if-no-brexit-deal-is-struck-1500830461
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