The Brexit effect: How the last two years have impacted the economy

Pound sterling dropped dramatically when the results came in on 23 June 2016, and it has failed to regain lost ground since then

Two years have passed since the UK voted to leave the EU, and the uncertainty the referendum result unleashed has only intensified the closer we get to Brexit.

Politically, negotiators still have not managed to reach agreement on some of the most important issues involved, such as membership of the customs union, and the Irish border.

The impact of this lack of clarity on UK business over the past two years is clear to see, with companies, markets and workers all feeling the effects.

Currency

The first sign of how dramatic an effect Brexit would have on the UK economy was the nosedive in the value of sterling overnight after the vote two years ago.

The pound plummeted to a 31-year low, dropping 10 per cent against the dollar to hit $1.33, and it has fluctuated but failed to regain much lasting ground since then, last week hovering around $1.32.

“The pound has become the main lightning conductor for market sentiment and in general a ‘hard’ Brexit or ‘no deal’ have been greeted with dismay by sterling. The prospect of a ‘soft’ Brexit has tended to receive a warmer welcome from the currency markets,” said Russ Mould, investment director at AJ Bell.

The stock market

The FTSE has benefited somewhat from that dramatic decline in sterling, rising 30 per cent in the time since the Brexit vote. This is largely because companies making their money overseas have been boosted as their earnings are now more valuable in sterling terms. Exporters have seen a bump in sales as foreign buyers see their products coming down in price.

Meanwhile, the drop in the pound has also attracted deal-hungry companies to British firms, such as US group Vantiv, which paid $10.4bn for the UK’s Worldpay last year, which helps keep the stock market buoyant.

However, while the FTSE has risen over the past two years, when compared with markets elsewhere around the globe, including the rest of Europe, its 30 per cent return is behind most rival regions. For example, the financial markets in Asia-Pacific have returned 56.8 per cent in that time, while the US rose 53 per cent. This is also put down to the fact that overseas holdings have become more valuable in the wake of sterling’s fall from grace.

And to top it off, firms are still considering their options when it comes to leaving the City. While it’s unlikely to result in a complete desertion, the number of businesses setting up shop elsewhere is not insignificant; some of the world’s biggest banks have begun moving jobs out of London, and several other companies have threatened to jump ship if it looks like Brexit will not pay off. For example, Airbus has warned that it will "reconsider its investments in the UK" if Britain leaves the single market and customs union without putting a transition agreement in place.

Skills

This has all conspired to add to a worsening skills shortage in the UK. Earlier this month, a survey revealed 90 per cent of employers are struggling to find the staff they need, and two-thirds believe the skills gap will either fail to improve, or get worse post-Brexit.

The construction sector has been particularly hard hit, with worker shortages hitting a record low earlier this year, according to figures from the Federation of Master Builders.

And the FMB’s chief executive, Brian Berry, warned that Brexit could make things worse, if it means free movement comes to an end.

“Without skilled labour from the EU, the skills shortages we face would be considerably worse, and it is not in anyone’s best interest to pull the rug out from under the sector by introducing an inflexible and unresponsive immigration system,” he said.

Economic growth

The strain is starting to show on the construction industry, with output figures from the sector making for grim reading this year. Manufacturing is facing similar difficulties, with the most recent numbers from the Office for National Statistics showing output in the sector had fallen to its lowest level for more than five years.

Overall, growth in the UK economy all but collapsed at the beginning of this year, dropping to a six-year low and falling well below market expectations. Economists said the extremely bad weather the UK endured throughout the first quarter of the year was partly to blame, but also noted that trepidation among businesses ahead of Brexit and the continued squeeze on incomes because of the aforementioned weakness in sterling were not helping.

Meanwhile, interest rates have stayed at 0.5 per cent as a long-awaited hike, originally expected in May, is kicked further down the line against a backdrop of disappointing data.

The looming spectre of Brexit is also believed to be keeping the Bank of England on the cautious side; Jacob Deppe, head of trading at Infinox, said any fallout from a premature hike could be “amplified” by us leaving the EU.

The resounding business response to all these setbacks has been a plea for clarity around the post-Brexit scenario. Charles Bowman, Lord Mayor of London, summed up this sentiment in his speech at Mansion House this week, attended by the chancellor, Philip Hammond. City firms “want a Brexit deal which enables them to continue business with minimal disruption”, Mr Bowman said.

“Being the world’s leading business centre, London is the home of global competitiveness, creating jobs, tax revenue and financial security for millions across the planet,” he said.

“But for London to remain the home of global competition – for it to continue providing prosperity to all – it does need a clear plan.”

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