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France overtakes Britain as world’s fifth largest economy as Brexit fears hit markets

Pound falls against the euro, putting France ahead of Britain for first time since 2014

Thursday 07 July 2016 10:11 BST

Uncertainty following Brexit vote has hit exchange rates and markets (iStock)

France has overtaken Britain to take fifth place on the list of the world’s largest economies after the pound slumped to a fresh 31-year low following last month’s Brexit vote.

The pound has fallen by about 14 per cent against the dollar since it hit $1.50 ahead of the referendum result, and has fallen 0.9 per cent against the euro to €1.1656 on Wednesday.

The fall against the euro – to the lowest level since 2013 – puts the value of France’s gross domestic product for 2015 slightly ahead of Britain’s according to one measure.

GDP is normally calculated over a year using average exchange rates, but if the rate for Wednesday is used France’s official GDP of 2.182 trillion euros would surpass Britain’s 2.172 trillion euros, Reuters reported.

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The UK has been the world’s fifth largest economy since 2014. France has previously held the title of the world’s fifth largest economy, losing it to the UK in 1997, as the UK boomed, but regaining it in 2008 as the global economic crisis hit Britain hard.

As the economic implications of the Brexit vote take hold, shares in UK companies took a hammering in trading on Wednesday.

6 ways Britain leaving the EU will affect you

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1/66 ways Britain leaving the EU will affect you

6 ways Britain leaving the EU will affect you

More expensive foreign holidays

The first practical effect of a vote to Leave is that the pound will be worth less abroad, meaning foreign holidays will cost us more

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6 ways Britain leaving the EU will affect you

No immediate change in immigration status

The Prime Minister will have to address other immediate concerns. He is likely to reassure nationals of other EU countries living in the UK that their status is unchanged. That is what the Leave campaign has said, so, even after the Brexit negotiations are complete, those who are already in the UK would be allowed to stay

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6 ways Britain leaving the EU will affect you

Higher inflation

A lower pound means that imports would become more expensive. This is likely to mean the return of inflation – a phenomenon with which many of us are unfamiliar because prices have been stable for so long, rising at no more than about 2 per cent a year. The effect may probably not be particularly noticeable in the first few months. At first price rises would be confined to imported goods – food and clothes being the most obvious – but inflation has a tendency to spread and to gain its own momentum

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6 ways Britain leaving the EU will affect you

Interest rates might rise

The trouble with inflation is that the Bank of England has a legal obligation to keep it as close to 2 per cent a year as possible. If a fall in the pound threatens to push prices up faster than this, the Bank will raise interest rates. This acts against inflation in three ways. First, it makes the pound more attractive, because deposits in pounds will earn higher interest. Second, it reduces demand by putting up the cost of borrowing, and especially by taking larger mortgage payments out of the economy. Third, it makes it more expensive for businesses to borrow to expand output

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6 ways Britain leaving the EU will affect you

Did somebody say recession?

Mr Carney, the Treasury and a range of international economists have warned about this. Many Leave voters appear not to have believed them, or to think that they are exaggerating small, long-term effects. But there is no doubt that the Leave vote is a negative shock to the economy. This is because it changes expectations about the economy’s future performance. Even though Britain is not actually be leaving the EU for at least two years, companies and investors will start to move money out of Britain, or to scale back plans for expansion, because they are less confident about what would happen after 2018

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6 ways Britain leaving the EU will affect you

And we wouldn’t even get our money back

All this will be happening while the Prime Minister, whoever he or she is, is negotiating the terms of our future access to the EU single market. In the meantime, our trade with the EU would be unaffected, except that companies elsewhere in the EU may be less interested in buying from us or selling to us, expecting tariff barriers to go up in two years’ time. Whoever the Chancellor is, he or she may feel the need to bring in a new Budget

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Shares in supermarkets Tesco and Morrisons tumbled by more than 7 per cent, and property stocks continued to slide after several major commercial property companies suspended trading in the UK due to investors pulling funds due to uncertainty following the referendum result.

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