21  All speeches are available online at www.bankofengland.co.uk/speeches  21  Chart 15: Trade-off that emerged after the referendum has diminished  UK households, businesses and financial markets have reacted at different speeds and to varying degrees to the prospects for the UK’s departure from the EU. In general, some of the disinflationary shock to demand has been deferred, not least because the UK has not yet left the EU, while most of the inflationary channels have begun to appear. Financial markets, particularly sterling, marked down the UK’s relative prospects quickly and sharply. The sterling ERI has depreciated by around 20% since the Brexit process became a possibility. UK focused equities have underperformed global advanced economy equities by around 30pp since the Referendum (in common currency terms) and UK long-run real yields are down by 60bp compared to those for the US. Households looked through Brexit-related uncertainties initially. But more recently, as the consequences of sterling’s fall have shown up in the shops and squeezed their real incomes, they have cut back on spending, slowing the economy. Businesses have been somewhere in between. Since the referendum, they have invested much less aggressively than usual in response to an otherwise very favourable environment (strong external environment, low cost of capital, favourable rates of profitability and limited spare capacity).
The UK has begun the process of redefining its relationship with its largest trade and investment partner. To be clear, the intention is not to turn inwards but rather to increase openness over time. In particular, the UK government’s objective is a “comprehensive, bold and ambitious free trade agreement with the European Union.” Leaving the EU is intended to enhance the UK’s ability to strike trade and investment agreements with a wide range of countries beyond those covered by virtue of its membership of the EU. But Brexit is an example of reculer pour mieux sauter. 44  That’s because any reduction in openness with the  EU is unlikely to be immediately compensated by new ties of a similar magnitude with other trade partners. And even if new agreements with other partners could be struck instantaneously, the reorientation of business relationships will take some time. This makes Brexit, relative to the experience of the past half century, unique. It will be, at least for a period of time, an example of de-globalisation not globalisation. It will proceed rapidly not slowly. Its effects will not build by stealth but can be anticipated. Let me turn to those effects. The first is the obvious disinflationary impact of Brexit given that the EU takes 44% of UK exports.