Abstract
The political turmoil in the UK following the referendum on future membership of the European Union in 2016 provides a natural experiment for studying the effects of political uncertainty on the economy. We find that the subsequent confusion and infighting in British politics has not affected the real economy much—employment is at a historical high and output growth is positive—but there are some signs of slowing investment and house price increases. The stock market has also not been much affected although it did fall after the referendum of 2016. The main effect of the Brexit vote and the subsequent political developments is found in the currency market where news that make a hard Brexit more likely cause the currency to depreciate. We conclude that leaving the European Union without an agreement is likely to make the currency depreciate and the stock market fall while output declines. In contrast, leaving with an agreement that gives continued access to the Single Market would likely make the currency appreciate, the stock market rise and employment and output increase further.
A preliminary version of this paper appeared as a working paper at the Birkbeck Centre of Applied Economics, BCAM 1907, 2019.
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Notes
- 1.
See Antonucci et al. (2017) who attribute the Brexit vote to the declining financial position of the middle class; Arnorsson and Zoega (2019) on the regional characteristics of the Brexit vote (older, less educated, lower income); Colantone and Stanig (2018) on global competition and Brexit; Fidrmuc et al. (2016) on the absence of a relationship between EU regional subsidies and the remain vote; Hobolt (2016) on the divisions in society; and Inglehart and Norris (2016, 2019) on the cultural factors behind the vote. Goodwin and Heath (2016) find that turnout was generally higher in more pro-Leave areas, which implies a greater intensity among those who wanted to leave than those voters who wanted to stay.
- 2.
Dustman and Frattini (2014) analyse the fiscal impact of immigration on the UK economy since 1995. They find that immigrants from the European Economic Areas (EEA) have made a positive fiscal contribution while non-EEA immigrants have made a negative contribution. Since 2000, the contributions have been positive throughout, in particular for immigrants from Europe.
- 3.
See Rodrik (2018) on the difference between left-wing and right-wing populism.
- 4.
- 5.
Dhingra et al. (2016) analyse the economic consequences of the UK leaving the European Union. They find that while these will depend on which policies the UK adopts following Brexit, lower trade due to reduced integration with EU countries will likely cost the UK economy much more than is gained from lower contributions to the EU budget.
- 6.
See Hill (1997) on political risk.
- 7.
See Forte and Portes (2017)
- 8.
FT250 data taken from investing.com
- 9.
Data taken from investing.com
- 10.
See also Corsetti and Müller (2016).
- 11.
- 12.
- 13.
- 14.
They were as follows: Remain: 16,141,241 (48.1%) Leave: 17,410,742 (51.9%).
- 15.
See Biggs (2008).
- 16.
- 17.
- 18.
- 19.
- 20.
- 21.
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- 25.
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Appendix
Appendix
Employment as a share of the population aged 16–64 (%) (Source: Office for National Statistics)
Annual rate of growth of UK house prices (%)
Gross fixed capital formation—quarterly changes (%) (Source: Office for National Statistics)
The pound-dollar exchange rate, 1971–2019 (Source: Authors’ calculations and investing.com)
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Engilbertsson, S., Zoega, G. (2020). The Effect of Brexit on the UK Economy (So Far). In: Paganetto, L. (eds) Capitalism, Global Change and Sustainable Development. Springer Proceedings in Business and Economics. Springer, Cham. https://doi.org/10.1007/978-3-030-46143-0_8
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