Of course confidence is not limited to helping economic growth. Lack of confidence certainly can lead to a major downturn with the multiplier effect. Negative confidence hits spending and other consumer economic activity (house buying, borrowing money etc) - the fall in consumer economic activity will hit profit forecasts, this will hit investment, this will hit job security, this will further hit spending. I'm surprised you're questioning it.
This is Bernard Connelly: economist in favour of Brexit, on the fall in sterling.
The reality is that Britain, in the EU or out of it, has a severely unbalanced economy in which, because of abnormally low interest rates, far too much spending has been brought forward from the future. Britain is not alone in that – it is a problem faced by many economies. But the huge current-account deficit (7% of GDP – an all-time record) is an indication that the problem is significantly worse in Britain than elsewhere.
That deficit cannot run on forever. It is not financed by “the kindness of strangers”, as Mark Carney notoriously claimed, but by the greed and folly of markets. It is quite simply inevitable that at some point markets will realise that Britain’s external position is unsustainable.
Britain is living beyond its means, in part because of the wholly illusory perception of “wealth” created by inflated house prices – in turn the result of aberrantly-low interest rates which are distorting the economy and creating a looming crisis for pension funds and life insurers.
The increase in British “living standards”, relative to underlying productivity growth, simply has to decline for a time. Britain needs higher interest rates, lower house prices and a weaker currency. That truth is undoubtedly unpalatable. But burying our heads in the sand, as Soros – and, irresponsibly, the Bank of England – seems to want to do, would only make things worse.
The longer it takes for that recognition to take hold, the more disruptive will be an he longer it takes for that recognition to take hold, the more disruptive will be an eventual “sudden stop” in the financing of the deficit, the bigger will be the sterling depreciation required to support output and employment in the face of reduced domestic demand (in the economics jargon, this comes mainly from switching demand from internationally-traded goods, mainly produced abroad, to non-traded goods, produced and sold only at home – a mechanism Soros seems not to have grasped) and the greater will be the risk of financial crisis.
The most serious risk of all for the British economy is that if the opportunity for political escape and economic re-balancing afforded by Brexit is not taken, market recognition of unsustainability will come in the context of the inevitable next phase of the euro crisis, or of a global financial crisis.