How has the Brexit vote affected the UK economy?
The pound fell sharply after the referendum, stabilised for a time and more recently has been falling again. It hit new 31-year lows against the dollar and at one point in early October was pummelled in a “flash crash”, thought to be caused by rogue computer trading. It now stands at around $1.22 and €1.12. The underlying pressure on the pound was driven by Theresa May setting a March 2017 deadline for starting the formal Brexit process, while hinting that the government would sacrifice access to the European single market in return for tighter immigration controls. The prospect of such a “hard Brexit” deal has knocked confidence in the UK’s longer term economic prospects, which has in turn hit the pound.
There is some evidence that the weaker pound has been helping exporters because it makes their products cheaper, and thus more competitive, in overseas markets. The latest official figures showed exports continued to rise in August. But imports grew at a faster pace, meaning the UK’s trade deficit with the rest of the world widened – despite hopes of a boost from sterling’s fall. The deficit on trade in goods with EU countries hit a record high of £8.4bn as imports from the bloc rose 5.1% and exports to it fell 0.6%.
The UK’s headline inflation rate jumped to 1% in September from 0.6% in August. It was the highest since November 2014; above economists’ forecasts of 0.9%. The jump was explained by the rise in prices of items such as clothing, fuel and hotel rooms. But it was also partly because prices were falling in September 2015, due to tumbling global energy prices. The Office for National Statistics said there was “no explicit evidence” a weaker pound was pushing up the prices of everyday consumer goods. However, inflation is expected to reach 3% next year, increasing pressure on household finances.