In the days after the referenfum on EU membership, the lack of confidence on markets was very clearly visible. The British share index FTSE 30, the German DAX 30 and the Eurostoxx 50 each lost around 5% in value. By October 2016, all indexes have once more recovered and are higher than the values before the referendum. Following the initial volatility, stock exchanges have reacted to the fact that the outcome is not so far a formal exit in accordance with article 50 of the Lisbon Treaty. This step will be initiated in March 2017, as Prime Minister May confirmed on 2 October 2016.
The British pound slid in value ahead of 23 June 2016
Sterling suffered a massive devaluation as soon as the referendum was announced. From the end of 2015 until the vote, the British currency lost around 10% of its value against the Euro. Immediately after the referendum, there was a further sharp correction of around 5 percentage points. By October 2016, the value has slipped a further 5 percentage points so that the pound is worth just under 20% less. However, the weak pound only helps British exports in the short term and has somewhat cushioned the negative economic influences on the United Kingdom in the first months. The other EU Member States are likely to experience a slight dampening of their exports. In 2015 Germany exported goods worth around 89 billion Euro and services worth more than 24 billion Euro to Great Britain. Even if German exports are competitive more on quality than on price, there are likely to be weak declines.
Increased uncertainty is causing lower investments in the medium term
The lack of clarity about the future status of the United Kingdom is causing investments to be delayed or cancelled. This effect continues to be weak in 2016 but is likely to lead to a softening of British growth in 2017. In July 2016 the European Commission forecast a decline from 1.9 to 1.1% (mild scenario) or even minus 0.3% (hard scenario). In September 2016, OECD forecast British growth of 1% in 2017, down from an earlier forecast of around 2%.
Growth prospects for Germany and the Eurozone decrease slightly
The generally increased uncertainty and falls in exports have prompted the above-mentioned institutions to revise 2017 growth forecasts for Germany and the Eurozone. In our view, GDP growth in Germany in 2017 probably needs to be corrected down slightly.
In the long term, the consequences depend on the shape of economic relations
A wide range of models between the EU and Great Britain is possible. In this regard, participation in the single market is decisive for the effects on the economic situation. Quantitative estimates on this point are hedged around with great uncertainty. Important policy decisions still need to be taken. It will be crucial for the investment climate that this political uncertainty is reduced and clear framework conditions for cooperation with the United Kingdom prevail.
The British referendum shows its first effects on the economic situation
The referendum in June 2016 has thrown European markets off track. In the short to medium term, the increased uncertainty places a brake on investments. The long-term consequences will depend on the practical arrangements for future trade relations.