No one can know for sure exactly how Brexit will unfold. And predictions about the future are contentious: Those who voted to leave the European Union argue that the move will free up billions of pounds that Britain sends to the continent each year, while those who voted to stay believe those benefit are greatly outweighed by the potential damages.
But many economists are predicting that Thursday’s decision will have a chilling effect on the British economy. Here is what that might mean in reality for everyday people and businesses, in Britain and abroad.
Hitting consumers where it hurts
One of the easiest effects of Brexit to understand is the likely impact on British consumers. Investors, anticipating that Britain’s economy would slow, have begun moving their money out of the country, a process that requires selling pounds and buying foreign currencies. That led to a historic drop in the value of the pound Thursday night, to its lowest level against the dollar since 1985.
That currency change means each British pound will buy fewer goods abroad than it once did. In other words, imports become more expensive, and the prices of many goods inside Britain will rise.
As a smallish island nation, Britain imports a lot, including more than half its food and nearly half of its oil and gas in recent years. In the run-up to the referendum, executives – including the heads of some of Britain’s largest retailers, such as Tesco, Marks and Spencer’s, Asda, Sainsbury’s and B&Q – warned that clothing, food, wine, and other imported products would likely become more costly for consumers following a vote to leave the E.U.
A weaker pound also reduces the spending power that Brits have when they travel abroad – meaning places like Ibiza and Tenerife will probably see fewer stag and hen parties in the near future.
The rising prices of domestic goods is known by another name – inflation. Inflation is currently quite low, so a small increase in prices might not be bad for the economy. But if prices rise too high, the Bank of England may have to step in and restrain them by raising interest rates – a move that makes borrowing more expensive, and would likely further slow growth and investment.
In the longer run, changes to trade agreements could further affect the cost of goods. For example, Britain is currently a member of the World Trade Organization through the E.U. So its departure raises questions about whether British imports and exports would be subject to new tariffs. We won’t know the answer to those questions for a while.
Hope for workers could be a mirage
With the drop in the value of the currency, the goods that British people import have automatically become expensive. However, there’s a flip side of this equation. As the British pound gets weaker, goods produced in Britain and sold abroad are priced more attractively.
This should theoretically spur exports, boosting British businesses – an idea Republican presidential candidate Donald Trump picked up on in a press conference in Scotland on Friday. “Look, if the pound goes down, they’re going to do more business,” he said.
This is likely true in the long run. The problem, economists say, is that this change can be slow to come about.
It takes time for companies to switch their suppliers from one country to another following a currency change, said Matthias Matthijs, an assistant professor of international political economy at the Johns Hopkins School of Advanced International Studies in Washington, D.C. And the ambiguity over how Britain’s taxes and tariffs might change in the next few years might dissuade companies from making moves to take advantage of the country’s cheaper exports. “There’s a cloud of uncertainty around how imports will be treated,” said Matthijs.
That uncertainty is also likely to clamp down on company investments in Britain, for example spending to expand manufacturing facilities, hire new workers or relocate business operations to the country. “Companies simply won’t know how this is going to play out, and therefore will put their spending on hold,” said Jon Loynes, chief European economist at Capital Economics, a London-based consultancy.
That prospect is particularly troubling for London, an international financial center that trades on its close connections with markets around the world. In a report in April, consultancy PWC estimated that Brexit could lead to the loss of up to 100,000 additional jobs in country’s financial services sector by 2020. This is likely one reason why a greater proportion of Londoners opposed Brexit than people in other parts of England.
“This takes place in an environment where globally, investment has already been very hesitant because of concerns about where demand and growth is going to come from,” said Patrick Chovanec, chief strategist at investment advisory Silvercrest Asset Management. “And now you add all this political and regulatory uncertainty on top of that, and it’s clearly going to curb investment.”
For everyday Britons, all of this likely translates into fewer working opportunities in the years to come, and less lucrative ones.
The uncertainty that the Brexit vote introduces is also particularly troubling for the millions of people who have taken advantage of Britain’s membership in the E.U. and crossed borders to work. An estimated 3 million non-British E.U. citizens live and work in Britain, while more than 1 million British-born citizens live in other E.U. countries.
These people will still be able to live and work in their current positions for at least two years, but after that their work permits and health benefits may disappear – casting deep uncertainty on their future and careers.
New rules for Britain's economy?
Supporters of Britain’s decision to leave have argued that Brexit will allow the country to control its own regulatory regime, and make the country a more attractive place to do business. It’s possible that changes like these could provide some benefit to the British economy, economists say.
“We’re certainly not suggesting that in the short term this is a positive for the U.K. economy. It’s not,” Loynes of Capital Economics said of Brexit. “But there are reasons why this referendum took place, and why over half of voters voted the way they did. There has been a lot of dissatisfaction with the European Union, with the regulatory pressures it’s imposed on companies, the financial contributions [the U.K. has] to make.”
However, any benefits of new regulation are by no means guaranteed. They have to be drafted and passed through the British legislature. “For it to be a positive thing, people have to seize the opportunity that’s being presented them, both in Europe and the UK. The benefits of Brexit won’t just come about,” said Chovanec.
But experts also raise questions about whether the British government, now or in the future, will be in a strong position to pass such legislation or negotiate advantageous trade deals. Matthijs of SAIS points out that Britain is now led by a lame-duck government under Prime Minister David Cameron, who announced on Friday that he would resign, and that his possible successor, Boris Johnson, the former London mayor who has helped lead the Brexit push, will face a divided party and a hostile House of Commons.
“Three-quarters of members of parliament in the U.K. are against Brexit. This is not at all aligned with the people, where 52 percent voted to leave," said Matthijs. "So I find it hard to believe that he will be a strong prime minister, who will have a strong hand to negotiate in Brussels.”
Amid all this gloom, Britain's economic relationship with the United States could be a bright spot. Analysts said that Britain’s exit from the E.U. was unlikely to affect the strong historic bonds across the Atlantic. Still, few expect Britain to negotiate its own independent free trade deal with the United States anytime soon.
Chovanec of Silvercrest compared Britain’s attempt to disentangle itself from the E.U. to a messy divorce, “in which there are a lot of shared assets, and there are a lot of kids,” he said. “Maybe divorce is the right thing for two people. It doesn’t make it any less messy, or complicated."