Britain’s vote to leave the European Union (EU) will lead to an economic downturn and possibly even a recession, most economists say.
But not all.
Some–many of them avowed Brexit supporters–argue that leaving the bloc will refocus British trade on higher growth regions while helping rebalance the economy toward manufacturing and away from its debt-laden consumer and risky banking sector.
That contrasts with the consensus, which predicts Brexit will damage the U.K. by taking it out of a tariff-free zone with its biggest trading partners while deterring foreign companies, particularly banks, from using Britain as their European base. The uncertainty over divorce negotiations between London and Brussels, meanwhile, will sap investment and spending.
On Monday, the latest business survey from IHS Markit showed that economic activity in the manufacturing sector is contracting at its fastest pace in three years. But the U.K. is still waiting for a clear verdict from economic data.
The message from economists who supported Brexit is: Don’t get too nervous.
“The men and women who populate industrial and commercial Britain were all told that end demand would collapse, and their buying behavior has reflected that,” said Savvas Savouri, chief economist at hedge fund Toscafund.
“When they realize they’ve done that unnecessarily, they’ll be manically bidding for goods to restock their inventories.”
Brexit presents economic opportunities, according to a small coterie of mainly British-based economists.
Britain can pivot itself away from the low-growth EU toward more dynamic economies, such as the emerging giants of Asia. The U.K. exports more goods to Ireland, with a population of 4.6 million, than to China.
Critics of the EU also argue the bloc has been particularly poor at negotiating trade deals. After six years of negotiation the EU has still not struck a trade deal with Canada.
“The EU record on trade deals was absolutely atrocious,” said Gerard Lyons, the former chief economist at Standard Chartered.
“In part, the referendum was about a mindset change to very much focus on the fast-growing and large economies in the world,” said Mr. Lyons, who is also co-chair of the group, Economists for Brexit.
For years, British politicians have talked of rebalancing Britain’s economy toward manufacturing, which currently accounts for only 10% of GDP. Now, here’s the chance, pro-Brexit economists say.
Since the June 23 referendum, sterling has declined by more than 10% when compared to a basket of currencies that the U.K. trades with most regularly. That makes British exports more competitive and imports more expensive.
Capital Economics, whose executive chairman is Roger Bootle, the co-chair of Economists for Brexit, has raised its export growth forecasts to 9% and 10.2% in 2017 and 2018, respectively. Before the vote, the forecasts were 7.9% and 9.2%.
But the evidence is mixed on the effects of a weaker pound on exports. The pound’s plummet in 2008, during the financial crisis, didn’t lead to a boost for exports. But that came amid a global downturn. In 1992, a steep fall in sterling did boost exports. But that was almost 25 years ago.
Phil Whyman, a professor of economics at the University of Central Lancashire, argues Brexit will benefit manufacturing in other ways. The U.K. will be able to encourage this sector in a manner that once contravened EU competition rules, he said.
Those rules mean the government cannot, for instance, offer preference to U.K. companies when tendering public contracts. Likewise, attempts to foster selected industries through subsidies often run afoul of state aid rules.
The U.K. government “was very keen to achieve a rebalancing of the economy, but favoring a domestic industry would be discrimination within the single market,” said Prof. Whyman.
Some economists also believe that a smaller banking sector won’t necessarily be a bad thing for a country still scarred by the credit crisis, when the government had to bail out overleveraged banks.
“It’s good that we have a comparative advantage, but we’re also left overexposed to financial crises,” said Prof. Whyman.
At the end of 2015, U.K. bank assets were equivalent to 269% of GDP, according to data from the Bank for International Settlements, and the World Bank. In Germany, the equivalent figure is 147% and in the U.S. it is 76%.
Other economists say the banking industry is key. For a start, it contributes as much as 8% of GDP. Instead, its potential migration to other parts of the EU, from where banks can passport services across the region, will be a big loss.
But over a month on from referendum, most economists remain pessimistic about the result. Last month Consensus Economics, a firm that polls forecasters, suggests that the average expectation is for U.K. growth of just 0.4% next year.
“The lower the barriers to trade and investment are, the more of those things you’ll have,” said John Springford, an economist at the Centre for European Reform, an EU-focused think tank. “Over the long term, less trade and investment is going to mean a smaller economy than would otherwise be the case.”