Read more: Brexit and the banks
The vote to leave the EU set off a period of extreme volatility in global markets. Both the FTSE100 and sterling plunged—but since then have returned to their pre-referendum levels. I have spoken to senior economists, both in Britain and abroad, who are deeply skeptical of Britain’s economic prospects. They are worried that Brexit will lead to recession, higher unemployment, more spending cuts and tax rises.
“There is a better than fifty-fifty chance if a hard Brexit scenario appears in train that a recession comes,” said Lawrence Summers, the former US Treasury Secretary and one of the most respected economic thinkers of our time. His remarks, made exclusively to Prospect, are serious cause for concern. There is political momentum behind the “hard Brexit,” option. Michael Gove, a leading contender to succeed David Cameron as Prime Minister, has made it clear that he wants Britain to withdraw from the European Single Market.
Charles Goodhart, formerly of the Bank of England and now a professor at the London School of Economics and senior consultant to Morgan Stanley was also concerned. “There is very little doubt that growth over the next few years will be slower than it otherwise would have been,” he said. “But quite how much slower is uncertain, because the effect of uncertainty is difficult to predict, and, in any case, events will depend much more on unforeseen developments abroad, for example whether Italy can resolve its banking problems.” This, he said, made it hard to predict whether Britain would enter a technical recession, defined as two consecutive quarters of negative growth, but, said Goodhart, “what is now likely is that growth will slow down to a crawl, and the rise in employment will fall away.”
“I think we are going to be in recession shortly,” said Gavyn Davies, the Chairman of Fulcrum Asset Management. “Everywhere I look, deals and investments are being postponed, and I think credit availability from the banks has already tightened. I think this is a massive economic own goal by the British electorate.” Nicolas Véron, a senior fellow at Bruegel, the Brussels think tank, and a visiting fellow at the Peterson Institute for International Economics in Washington, DC, said that “a recession in 2017 is now the baseline scenario for the UK. Prolonged political uncertainty is almost inevitable and will depress investment and possibly also consumption.” He added that “the boost to exports from a lower pound is likely to be limited.” The most likely structure of a post-Brexit relationship with Europe would, he said, be “a Canada-like deal with tariff-free trade but no inclusion in the single market (Scotland is more difficult to predict). In that case the City and related professional services are likely to shrink significantly, permanently lowering English GDP.”
George Magnus, the economist, writer and regular Prospect contributor, said he thinks “most probably that we will go into a recession, with GDP tailing off from the third quarter of 2016 and going on possibly for two to three quarters at least. By 2017, I'd expect GDP to have fallen by about 1-1.5 per cent, so we'll throw away gains made after surpassing the 2008 peak.” Magnus said that the next Chancellor would have to jettison George Osborne’s fiscal rules and “there will doubtless be a worrying OBR report at the Autumn statement which will be used to pencil in medium term tax rises and spending cuts.”
A former senior Bank of England official made the same point, telling me, on condition of anonymity, that “a technical recession [is] a strong risk—due to fall in investment and household incomes squeezed by higher import prices.” On Britain’s fiscal position, the official added: “It would be wise for fiscal policy to be loosened to support us through this.” Stewart Wood, a close advisor to Ed Miliband, also remarked that “The competitive boost from a weaker pound won't compensate for the blow to investment certainty. And my guess is the government will respond by the end of the year by raising taxes and cutting spending which will further slow down our economy.”
Jonathan Portes, the Principal Research Fellow at the National Institute of Economic and Social Research, said that Brexit was most likely to bring a fall in investment and hiring. “This will have adverse consequences for output and employment,” he said. “It is too soon to say if this will lead to a recession, but given that the economy was weakening already, it would hardly be surprising.” Barry Eichengreen, Professor of Economics and Political Science at Berkeley, was concerned about the possibility of “a massive negative shock to investment,” brought about by the EU referendum result, as investors delay their projects until political and economic uncertainty is resolved.
“The Bank of England and government need to do what they can to mute the negative investment response,” said Eichengreen. “This means bank rate cuts and renewed security purchases by the central bank [more quantitative easing]—weak soup but better than no soup at all—and temporary investment tax credits to encourage investors to front-load rather than back-load their projects.” He stopped short of predicting a recession, as did Avinash Persaud, chairman of Intelligence Capital, who forecast slow growth, but nothing worse than that. A senior Conservative back bench MP who spoke on condition of anonymity said that Brexit would not lead “directly” to recession, but commented that the economic cycle looked “toppy,” and that political disruption “will not help.”
Part of that disruption will be caused by Britain’s renegotiation of economic and trade agreements with other countries. A recent note issued by JP Morgan on Britain’s ability to broker new deals makes for deeply uncomfortable reading.
“The UK starts from a position where it does not have a deep well of resources and experience within the civil service to deal with trade issues. The UK’s negotiating position in these discussions is also likely to be very weak.”
The note concluded: “It is likely that the UK’s access to non-EU markets will become markedly more constrained in the wake of the EU exit for a period of years. And to the extent that the UK is able to secure “quick” deals, it is unlikely they will be on terms which are advantageous to the UK.”
A former senior government official told me that “we are very likely to have a recession,” before offering an image that more than any other captures the current mood among economists and policymakers: “My image of the UK economy is road runner running off the cliff—at the moment we are suspended in mid air with our legs going round and round…”
The vote to leave the EU set off a period of extreme volatility in global markets. Both the FTSE100 and sterling plunged—but since then have returned to their pre-referendum levels. I have spoken to senior economists, both in Britain and abroad, who are deeply skeptical of Britain’s economic prospects. They are worried that Brexit will lead to recession, higher unemployment, more spending cuts and tax rises.
“There is a better than fifty-fifty chance if a hard Brexit scenario appears in train that a recession comes,” said Lawrence Summers, the former US Treasury Secretary and one of the most respected economic thinkers of our time. His remarks, made exclusively to Prospect, are serious cause for concern. There is political momentum behind the “hard Brexit,” option. Michael Gove, a leading contender to succeed David Cameron as Prime Minister, has made it clear that he wants Britain to withdraw from the European Single Market.
Charles Goodhart, formerly of the Bank of England and now a professor at the London School of Economics and senior consultant to Morgan Stanley was also concerned. “There is very little doubt that growth over the next few years will be slower than it otherwise would have been,” he said. “But quite how much slower is uncertain, because the effect of uncertainty is difficult to predict, and, in any case, events will depend much more on unforeseen developments abroad, for example whether Italy can resolve its banking problems.” This, he said, made it hard to predict whether Britain would enter a technical recession, defined as two consecutive quarters of negative growth, but, said Goodhart, “what is now likely is that growth will slow down to a crawl, and the rise in employment will fall away.”
“I think we are going to be in recession shortly,” said Gavyn Davies, the Chairman of Fulcrum Asset Management. “Everywhere I look, deals and investments are being postponed, and I think credit availability from the banks has already tightened. I think this is a massive economic own goal by the British electorate.” Nicolas Véron, a senior fellow at Bruegel, the Brussels think tank, and a visiting fellow at the Peterson Institute for International Economics in Washington, DC, said that “a recession in 2017 is now the baseline scenario for the UK. Prolonged political uncertainty is almost inevitable and will depress investment and possibly also consumption.” He added that “the boost to exports from a lower pound is likely to be limited.” The most likely structure of a post-Brexit relationship with Europe would, he said, be “a Canada-like deal with tariff-free trade but no inclusion in the single market (Scotland is more difficult to predict). In that case the City and related professional services are likely to shrink significantly, permanently lowering English GDP.”
George Magnus, the economist, writer and regular Prospect contributor, said he thinks “most probably that we will go into a recession, with GDP tailing off from the third quarter of 2016 and going on possibly for two to three quarters at least. By 2017, I'd expect GDP to have fallen by about 1-1.5 per cent, so we'll throw away gains made after surpassing the 2008 peak.” Magnus said that the next Chancellor would have to jettison George Osborne’s fiscal rules and “there will doubtless be a worrying OBR report at the Autumn statement which will be used to pencil in medium term tax rises and spending cuts.”
A former senior Bank of England official made the same point, telling me, on condition of anonymity, that “a technical recession [is] a strong risk—due to fall in investment and household incomes squeezed by higher import prices.” On Britain’s fiscal position, the official added: “It would be wise for fiscal policy to be loosened to support us through this.” Stewart Wood, a close advisor to Ed Miliband, also remarked that “The competitive boost from a weaker pound won't compensate for the blow to investment certainty. And my guess is the government will respond by the end of the year by raising taxes and cutting spending which will further slow down our economy.”
Jonathan Portes, the Principal Research Fellow at the National Institute of Economic and Social Research, said that Brexit was most likely to bring a fall in investment and hiring. “This will have adverse consequences for output and employment,” he said. “It is too soon to say if this will lead to a recession, but given that the economy was weakening already, it would hardly be surprising.” Barry Eichengreen, Professor of Economics and Political Science at Berkeley, was concerned about the possibility of “a massive negative shock to investment,” brought about by the EU referendum result, as investors delay their projects until political and economic uncertainty is resolved.
“The Bank of England and government need to do what they can to mute the negative investment response,” said Eichengreen. “This means bank rate cuts and renewed security purchases by the central bank [more quantitative easing]—weak soup but better than no soup at all—and temporary investment tax credits to encourage investors to front-load rather than back-load their projects.” He stopped short of predicting a recession, as did Avinash Persaud, chairman of Intelligence Capital, who forecast slow growth, but nothing worse than that. A senior Conservative back bench MP who spoke on condition of anonymity said that Brexit would not lead “directly” to recession, but commented that the economic cycle looked “toppy,” and that political disruption “will not help.”
Part of that disruption will be caused by Britain’s renegotiation of economic and trade agreements with other countries. A recent note issued by JP Morgan on Britain’s ability to broker new deals makes for deeply uncomfortable reading.
“The UK starts from a position where it does not have a deep well of resources and experience within the civil service to deal with trade issues. The UK’s negotiating position in these discussions is also likely to be very weak.”
The note concluded: “It is likely that the UK’s access to non-EU markets will become markedly more constrained in the wake of the EU exit for a period of years. And to the extent that the UK is able to secure “quick” deals, it is unlikely they will be on terms which are advantageous to the UK.”
A former senior government official told me that “we are very likely to have a recession,” before offering an image that more than any other captures the current mood among economists and policymakers: “My image of the UK economy is road runner running off the cliff—at the moment we are suspended in mid air with our legs going round and round…”
