While 2016 GDP growth in the UK was merely modest after the Brexit vote, it certainly exceeded the expectations of an immediate downturn. Thus, the anemic first quarter number was considered perhaps an anomaly. But second quarter growth was hardly any better, meaning that the UK has had virtually no growth so far in 2017. It also appears that what little growth there was primarily was driven by increased borrowing, which is sustainable for only so long, as we have seen. There are potentially two primary drivers for the decline in growth, austerity and Brexit.
Simon Wren Lewis writes that, while austerity slowed the UK economy in 2015 and 2016, the current slowdown is primarily driven by Brexit. The immediate depreciation of the pound after Brexit has not been offset by a corresponding increase in exports, simply because British companies have no idea what markets may disappear when the government finally figures out how leave the EU. Of course, an easier fiscal policy would also help juice the economy but that would be a total repudiation of everything the Conservative government has preached since David Cameron became Prime Minister.
As the economy begins to sink and jobs, especially in the financial industry, start moving to the Continent, the cries to either put a hold on Brexit or actually reverse it grow louder. Those calls are exacerbated by the total ineptitude of the Conservatives to even put forth a coherent strategy and plan for leaving the EU. Virtually everyone knew that it would be virtually impossible to negotiate all the complex issues that Brexit creates in the two year window that is required. Yet Theresa May and the Tories pushed ahead to invoke Article 50 and began the process. Now, in the wake of their repudiation at the polls, even the Conservatives are realizing that some sort of transitional agreement is needed in order to avoid total chaos in 2019.
Unfortunately, as with Republicans in the US, the Tories are caught between the hard-Brexit faction that wants a clean break from the EU and those that finally realize a transitional agreement will be needed. There is no agreement within the party on the critical issues of free movement and access to the EU customs union. In addition, the hard Brexit faction looks at any transitional agreement as just a way around implementing Brexit, having no faith that the "transition" will ever end.
As the Conservatives bicker with themselves, there is no guarantee that the Europeans will be interested in a transitional agreement in any case. The EU has been under enormous strain ever since the financial crisis nearly a decade ago and there have been enormous efforts to ensure that leaving the EU, possibly beginning an avalanche of demands from other members and resulting in possible dissolution, will be as painful as possible. There is no reason to think that the Europeans are interested in making Brexit easier and less painful for the UK through something like a transitional agreement.
It has become abundantly clear that the UK and the US scored two of the biggest own goals in political history with the votes for Brexit and Donald Trump. Yes, the votes indicate how poorly both governments dealt with the losers of globalization and automation, giving all the gains to the holders of capital, those mythical "job creators", and leaving those displaced workers to largely fend for themselves. But, in both countries, those disenchanted voters decided to essentially blow the entire system up by the slimmest of margins and for largely different reasons. Now both countries are going to spend years trying to clean up the carnage created by those votes.
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