British people have woken up to the news that their country has voted to leave the European Union. Along with this, there has been turmoil in financial markets – the pound has hit a 30-year low and the FTSE dropped more than 8%.
Though the Brexit process will probably take two years (and the UK will remain a full member of the EU in the meantime), some aspects of the decision will affect British people straight away.
1. The pound in your pocket
There is inevitably going to be a period of uncertainty and turmoil. As the referendum result emerged, the pound fell 10% against the US dollar on the foreign exchange markets and 7% against the Euro. If this persists, things the UK imports, such as oil (affecting domestic fuel prices and petrol), foreign cars, coffee, bananas and clothing, will cost more. Overall, then, the general price level may rise meaning that your income will not stretch quite so far.
If you’re holidaying abroad over the coming months and haven’t bought your currency yet, the weaker pound means you’ll also now pay more.
2. Your job and income
A weak pound affects industry as well and so may impact on jobs. Company costs will rise if they import their raw materials and most firms will be hit by higher fuel prices. But the fall in sterling makes it easier for exporters to sell their goods and services abroad. So some jobs and wages may be more at risk, while recruitment rises in other areas.
Longer term, economists have been remarkably consistent in predicting that UK growth is likely to be lower outside the EU than it would have been inside. Businesses do not like uncertainty, so they may put off investing in new plant, machinery and jobs, as being outside the EU trading bloc may make trading with other countries more difficult and some firms may decide to quit the UK. This could mean that jobs and wages will be lower than they might otherwise have been, though not necessarily lower than today.
Before the referendum, Chancellor George Osborne threatened a post-Brexit emergency Budget that would cut public spending and raise taxes. This seems an unlikely immediate response since it would further depress the UK economy just when it is reeling with uncertainty and MPs across all parties were quick to say they would not support such measures. A new prime minister, due from October, may well appoint a new chancellor with his or her own ideas.
3. Your savings and pensions
Uncertainty while markets adjust and firms decide how to respond means the UK stock market is likely to be volatile for some time. Anyone who has recently retired and opted to take an income using drawdown (periodic cashing in of a pension fund still invested in the stock market) may have to take tough decisions about drawing less income now or risk running out of retirement savings later on.
Pensioners may face some complications.shutterstock.com
Savers have suffered since the global financial crisis of 2008 with rock-bottom interest rates. It’s unclear what might happen to these. On the one hand, rising consumer prices may push interest rates up; and credit rating agencies have said they may downgrade UK government debt which means the government would have to raise interest rates to persuade savers to buy its debt. But, if the economy struggles to grow, the Bank of England – which has said it stands ready to deploy any measures to maintain financial stability – might embark on new rounds of quantitative easing to keep interest rates low to encourage economic growth.
4. Your home and mortgage
While savers would welcome a rise in interest rates, this would increase mortgage repayments for borrowers and could even trigger repossessions. The International Money Fund has predicted that UK house prices could drop sharply post-Brexit. You might be concerned about that if you are in one of the six out of ten UK households that own their own home. But this could be good news for younger generations who have been struggling to afford a home.
Author: Jonquil Lowe, Lecturer in Personal Finance, The Open University
