So it finally happened, on 23 June 2016, the United Kingdom voted for Brexit. As the polling stations closed, the UK Pound surged to hit 1.50 dollars to the £. This was a 6 month high. Within 12 hours the UK £ suffered its biggest loss in twenty years after it became clear that the UK had voted for Brexit, the term giving to the UK leaving the European Union.
So is this bad news. Yes and no. The fall in the £ is likely to be a short term fall. Over the next couple of months the £ will gain against the dollar as the US General Election approaches. The £ should also increase in value as the markets remember how bad the Euro economy is, compared to the UK.
So are large falls bad. The most recent example of a significant fall in the value of the pound was in 1992, when George Soros broke the Bank of England. The pound dropped in value by 20 per cent as the UK left European Exchange Rate Mechanism. This invigorated the economy, and started a period of growth in the next 14 quarters.
So are large falls bad. The most recent example of a significant fall in the value of the pound was in 1992, when George Soros broke the Bank of England. The pound dropped in value by 20 per cent as the UK left European Exchange Rate Mechanism. This invigorated the economy, and started a period of growth in the next 14 quarters.
So how will this affect the man on the street.
Oil is bought in dollars, so a decrease in stirling values, for more than a few days could filter through to the price of fuel, causing fuel prices to go up slightly. However this will take about a month to feed through to the petrol stations.
Mortgages are unlikely to be affected, provided the Bank of England allows the £ to float on the markets. It is possible that they will intervene and raise interest rates, but this would be foolish.
Jobs in manufacturing could be saved. The cheaper £ makes exporters more competitive, so if this drop lasts more than a few months, manufacturers will see a boost.
Prices in the shops may go up, but the largest suppliers will have price protection mechanisms agreed with suppliers to ensure that the cost of goods will be fairly consistent. Also as we go forward, the UK will be able to remove protectionist tariffs that add to the costs of shoppers. For example, Bananas imported in from non EU countries are charged 114 Euros per tonne. The UK will be able to remove these charges once it invokes Article 50, which is the formal notice of quitting the EU, and unless extended this becomes automatic after two years.
Going forward, where will we be. Well Brexit should see a boost to the UK economy and this in term will flow through to the man in the street, who should also see raises in their pay as the National Living Wage comes into affect. Its exciting, and will probably lead to a significant kick start to the UK economy.
Finally, there is no evidence to expect the UK to go into recession. Brexit is going to allow the UK to grow its own exports and to trade with the world unfettered by 27 other nations.
