What are the economic consequences of Brexit?

Published on 01/08/2016

The result of the referendum held on 23 June wrong-footed the financial markets, which had anticipated the United Kingdom remaining within the European Union. Major uncertainties about the negotiation schedule and, in particular, the future relationship between the United Kingdom and the EU are sources of heightened financial volatility.

View of London with Union Jack flag

The uncertainties may also lead to the postponement of corporate investment decisions, an increase in the UK interest rate and a drop in prices on the property market, notably for commercial property. Despite the sharp depreciation in the pound sterling, foreign trade also risks being strongly impacted by the results of the vote, with exports of goods and services to the EU representing 13% of UK GDP. In this context, we have therefore downgraded our growth forecasts for the United Kingdom to 1% in 2017, compared to our previous 1.7% figure. The EU will be less affected due to the low weighting of the United Kingdom in its exports (less than 4% of the EU’s GDP). Euro zone growth will likely be downgraded to 1.4%, compared to 1.6% previously. Nevertheless, certain countries will be more sensitive, in particular Ireland, the Netherlands and Belgium, due to their greater commercial and financial ties with the United Kingdom.

The flight towards security triggered by the result of the referendum led to a marked drop in sovereign interest rates in the United Kingdom, as well as in the United States and the euro zone. The Bank of England is expected to lower its key interest rate during the summer. Upward pressure on the US dollar has made the US Federal Reserve’s decisions regarding monetary policies more complicated, which is likely to further delay an increase in its interest rates. The European Central Bank may extend its asset purchase programme beyond March 2017.

In conclusion, the effective economic and financial consequences of Brexit will be seen over time and according to the unfolding negotiations between the EU and the UK.