Britain’s flagging economy: is Brexit to blame?

According to Heisenberg’s uncertainty principle there are limits to the precision with which we can be certain about the properties of a particle. “The position and the velocity of an object cannot both be measured exactly, at the same time, even in theory. The very concepts of exact position and exact velocity together, in fact, have no meaning in nature.”

As in physics so in economics. There are limits to the precision with which we can judge the impact of the interminable drama that is Waiting for Brexit. The precise “object” of Brexit is not clear, let alone its impact, or speed of impact. That said, we know it will have an impact, and this can be broadly estimated.

Let’s go to the data. The most recent real GDP stats for the UK from 2014 to 2018 (with the OBR estimate for this year) show the annual percentage rate of growth. In 2014 the figure was 2.9. In 2015, 2.3. Then 1.8, 1.7 and for this year the estimate is 1.3. Can you, Prospect readers, spot a trend? The referendum took place in the middle of the period and the result—it would seem—served to reinforce the already slowing rate of the economy.

Our main EU comparator economies were expanding over this period, as they slowly recovered from the harsh impact of the eurozone crisis. Then very recently, that recovery began to reverse. The US is on a different journey, pumped up by the Trump tax-cut stimulus. If we put together percentage change data for France, Germany, Italy and the US, with the latest UK data for the third quarter of 2018 (change over Q3 2017) we get the following trajectories. France’s GDP expanded by 1 per cent in 2014, but rose steadily to 2.2 per cent in 2017. Germany maintained a steady 2.2 per cent growth rate, as did the US. Italy expanded by just 0.1 per cent in 2014, but improved steadily to 1.6 per cent in 2017. The UK by contrast declined from 2.9 per cent in 2014 to 1.8 per cent in 2016, and then fell further in 2017 to 1.7 per cent and we may reasonably assume that this carried into 2018. This would make a combined effect, for the two years, of around £30bn lost output. It seems unlikely, from these comparisons, that the Brexit loss figure is more than that—but it could be a bit less.

When we examine in more detail the components of UK GDP, we notice that “business investment” was the largest contributor to the slowdown. Given uncertainty, that is no surprise. In 2014, the real increase in business investment was 5.2 per cent, and in 2015 it was 3.7 per cent. In 2016, however investment fell by 0.2 per cent, followed by a modest gain of 1.8 per cent in 2017. Comparing the first three quarters of 2018 with the same in 2017, the rise is just 0.1 per cent. If we assume that business investment might have risen, absent Brexit, by 10 per cent from 2015 to end 2018, this suggests a shortfall of around £15bn related to Brexit. In other words, the fall in business investment accounts for the bulk of the impact of Brexit on the economy.

More recent 2018 GDP figures on industrial production and manufacturing do indeed show a slowdown, but 2017 was reasonably firm, so it is hard to pin the reason on Brexit. On trade, the lower pound post-referendum seems to have had some limited positive effect, as exports of both goods and services have grown (in real terms) since the end of 2016 a little faster than imports. As regard services, the cornerstone of our economy, more recent data indicate an overall slowing in the annual rate of growth (now well below 2 per cent)—but it is again hard to discern any direct Brexit effect.

In reviewing this data another trend is often ignored: the ongoing impact of austerity economics, for which the Treasury must take so much responsibility. HMT policy has deliberately constricted the economy at a time of private sector weakness. Both the OBR and HMT have consistently under-estimated the output gap. By underestimating, for example, the demand for labour, the OBR has had to amend its “sustainable level of unemployment” four times—from 5.5 per cent to 5 per cent; then to 4.5 per cent and now to 4 per cent. Soon it may shift to 3.5 per cent. At the same time, both the Treasury and OBR have underestimated the likely “multiplier” effect of fiscal policy—both the negative and positive multiplier. As a result cuts in public spending have damaged the overall economy more than estimated, and the positive effect of expanded investment has consistently been denied.

Let me be clear: a chaotic Brexit process could have a devastating economic impact. However, the evidence shows that—to date—it is austerity, not Brexit, that has had the most negative long-term impact on the British economy.

 

By Ann Pettifor, Council Member, Progressive Economy Forum