While the UK economy did better than predicted in 2016 in the immediate aftermath of the referendum vote on leaving the European Union, growth has since stalled and inflation has risen. Beginning in January, I have been saying that risks from Brexit are rising. Let me reiterate that case below.

Now, because this is such a contentious subject, with Britain evenly split on the issue, I think a timeline is in order here. I will use my blog posts as the markers.

June 2016: Six days after the referendum, when I wrote my first post-Brexit blog post, there was still a lot of shock that the UK had voted to leave the EU. Remain supports were particularly vocal in voicing concern about downside risks, to the point where there was a widespread belief that Britain would immediately fall into recession. I pushed back against that narrative as motivated reasoning.

My view at the time was that “the unexpected ‘Leave’ victory in the recent referendum on EU membership introduces considerable political risk by elevating tail risk scenarios to reasonable worst case status” but that most of the risk was financial and much of it centered outside the UK due to where financial sector vulnerabilities lay. Italian banks were an example. Regarding the UK, I wrote that “my base case scenario is that there are minimal medium-to longer-term impacts on the economy or earnings”. Why is that?

Because Britain has its own currency, it also has the natural stabilizing force of flexible fiscal policy and exchange rates to offset economic shocks. And so, while Brexit would create shocks to investment and trade flows, these shocks would be dampened, if monetary and fiscal authorities reacted appropriately. The losses would be minor – though cumulatively it would mean an impoverishment of Britons of say 5-10% through higher inflation and lower growth. Let’s come back to this point later in the timeline but move forward to later in the summer first.

Summer 2016: Two days after my first post and eight days after the referendum, I wrote that because UK fiscal and monetary policy offsets would kick in, it was bullish for gilts. So, contrary to the prevailing view about recession, what I was saying is that no investment and consumption decisions were going to be revised straight away. People don’t work like that. Even so, if things started to go south, the currency would depreciate and fiscal policy would kick in enough to take the sting out of things. In a scenario of uncertainty though, coupled with the likelihood of lower interest rates, it was clear to me that there would be a flight to safety and British government bonds would benefit greatly – at least over the short-term.