Economic effects rarely happen suddenly. Usually it takes time for things to work through the system. Talk of a “cliff” is emotive, but in reality it all takes time.
The Pound & Immigration
Two main economic effects are already to be seen and their consequences are being gradually absorbed. These are the drop and continuing fall in the value of the pound and the reduction in immigration. Neither of these effects was brought about by government action. They are both consequences of people overseas - in the one case currency speculators and in the other potential immigrants - coming to think that the UK is no longer as attractive a place in which to invest.
In other words, the country has lost goodwill. In economics, goodwill is treated as an asset and valued. For some organisations it is the largest asset on the balance sheet.
The fall in the value of the pound means that imports cost more. Businesses have to cope with high costs for raw materials. This gradually feeds through to the cost of things in the shops. The price of living rises.
The reduction in the number of immigrants creates a labour shortage. Many enterprises have been used to relying upon immigrant labour. The Health Service is one major example - foreign doctors and nurses make up a significant part of the workforce. Other examples range from universities to fruit farms.
Normally, a labour shortage would lead to rising wages and salaries, but so far this has not happened. We can speculate why not. One reason will be that employers are already under pressure from rising material costs and simply cannot afford to pay rising labour costs as well. This, however, is probably a temporary situation.
Static wages and rising prices combine to mean a falling standard of living. If this continues for long it is likely to have political repercussions. Whether people (rightly) blame it on Brexit or not, they are certainly likely to blame it upon whichever political party is in power at the time.
A Return to the Bad Old Days
However, things might go differently. We can expect that labour costs are going to start rising. Rising wages coupled with rising material costs result in prices rising even more rapidly. This tends to create a vicious circle as wages try to keep up. This is a recipe for rapid inflation and a return to the days of “boom and bust”. This is one of the things that the structure of the EU is designed to prevent or minimise and leaving the EU means that the UK is likely to, once again, return to the old pattern that caused havoc in the years before joining Europe. The pattern tends to be exacerbated by the efforts of political parties to try to ensure that the “bust” periods occur when the other party is in power.
Once the UK has left the EU it will try to form trade agreements with other countries. The USA and Australia, for instance, have both expressed interest. However, in any such negotiation the UK is likely to be in a rather weak position because the other party will know that the UK needs such agreements rather desperately. Also, other parties are only likely to be interested if they judge that they are likely to sell more to UK than UK sells to them. A series of agreements of that kind, however, would be very bad for the UK balance of payments. This in turn would result in the pound falling even lower and all the effects discussed so far being exacerbated.
In order to overcome these effect the UK would need to do a number of things. Two of the most important would be (a) improve productivity and (b) attract foreign productive investment. Neither of these is particularly easy to achieve and especially in the circumstances outlined. At present, UK industry is about 80% as efficient as German. This is not good enough. To bring it up would probably require considerable public investment in new technology and infrastructure, or equivalent investment from some other source. At present, the UK is still attracting foreign investment, but there is reason to suppose that this is mostly not of the productive kind and is more in the nature of asset stripping. With the pound low, UK assets are cheap to foreign buyers.
A further factor is the particular structure of the UK economy that evolved in the Thatcher years. Britain is, compared with other countries, disproportionately dependent upon income from financial services. These “invisible exports” are far more significant to the country than material products. However, it is indisputable that with Brexit some of this trade is going to be lost. The question that remains is, how much? Some business will undoubtedly go to Dublin, Paris, Frankfurt and elsewhere. Some has already gone. This could be a significant hole in the bucket.
Before the referendum, all of the independent international economic think-tanks were indicating that Brexit would be bad for the UK economy. It still looks as though they were right. That the economy did not crash over-night does not mean that they were wrong. It is already in some trouble and the deterioration is likely to gradually augment for some time to come. Whether and how the public and the government will come to take these facts on board remains to be seen.