Where is the British economy headed

Less obvious, but perhaps even more important, is that for various reasons we will see a sharp drop in net migration from the EU. There were signs of decline even before the referendum as England's labor market slowed and home economies improved. Another slowdown in England, driven by Brexit, will compound this process, especially as industries like London's financial sector, which are hiring large numbers of migrants, are likely to be affected. In addition, migration from some EU countries such as Poland responds relatively quickly and comprehensively to exchange rate movements. The value of the English minimum wage in zloty has already fallen by ten percent. In addition to these economic reasons, there are legal and psychological reasons. EU citizens tend to have the reasonable notion that they have unlimited right of residence, which is supported by most, if not all, politicians. However, there will be an inevitable period of prolonged uncertainty. Furthermore, we were able to observe isolated but very unpleasant outbreaks of racism. The perception that EU foreigners are no longer welcome is widespread. There is already anecdotal evidence that many are thinking about going back to their homeland.

Bad forecasts

All of these factors are clearly negative for the short term growth outlook. Although a substantial reduction in net immigration could moderate the impact on the unemployment rate for native Britons and also ease political pressure on the government, it would lower the overall forecast for employment, growth and tax revenues.

On the positive side, various dampers of economic shocks will come into play. A falling exchange rate is not in and of itself positive as it reflects lower growth prospects and makes the British poorer consumers, but it also has the potential to support exporters and domestic industries that compete internationally, from manufacturing to tourism. The latter in particular should feel the benefits. Ordinarily we would fear the impact of higher import prices on inflation, but with inflation consistently staying below its target, rising inflation seems to be our least of all of our problems for a long time to come.

Economic policy will also provide support. The Bank of England has made it clear that in the short term, if the exchange rate does not fall unexpectedly low or inflation rises sharply, it will react to the economic weakness triggered by Brexit with more relaxed than restrictive monetary policy. However, the central bank recognizes the limits of its influence - interest rates are close to zero and the effectiveness of quantitative easing is questionable.