Saturday, April 16, 2016
Let's hope it's just fear of Brexit hitting growth
Posted by David Smith at 09:00 AM
Category: David Smith's other articles


My regular column is available to subscribers on This is an excerpt.

The sun has been shining, the birds singing and the days getting longer. But if the economy has a spring in its step it is keeping it well hidden. That squelch you hear underfoot is a soft patch.

The National Institute of Economic and Social Research, which uses official data and other information to calculate gross domestic product a monthly basis, reckons growth slowed to just 0.3% in the first quarter, half its rate in the final three months of last year, and its slowest since late 2012.

The British Chambers of Commerce, in its latest quarterly survey a few days ago, reported that growth had softened in the first quarter, “with most key survey indicators either static or decreasing”.

A similar message has been emerging from the monthly purchasing managers’ surveys compiled by Markit, the information services provider. As Chris Williamson, its chief economist, put it: “Survey data indicate a slowing in UK economic growth in the first quarter, with the suggestion that the pace is more likely to ease further rather than recover in coming months as business confidence remains unsettled by worries at home and abroad.”

In fact, though these things can change, it has been hard to find very much of cheer in the recent numbers. Even consumers appear to have been letting the side down. The British Retail Consortium reported that the value of retail sales in March was flat compared with a year earlier, with so-called like-for-like sales down by 0.7%. It ascribed this “relatively disappointing” picture to the timing of Easter, though in the past Easter has often provided a spending boost.

In some ways, weaker growth is not a surprise. Though the storm has now passed, the first few weeks of the year were characterised by a mood of deep gloom, and some deeply gloomy reporting of it, with markets plunging, the oil price apparently tumbling towards $10 a barrel (it is now in the mid-$40s) and George Osborne warning of a dangerous cocktail of risks. I am not suggesting your average Primark shopper keeps a close eye on the daily gyrations of the FTSE 100 but these things do percolate through to the mood.

Fortunately, too, we have another ready explanation for this period of weaker growth. I am not sure how wise it was for the International Monetary Fund to enter the Brexit debate a few days ago. At a time when at least some British voters are fed up with unelected supranational institutions throwing their weight around, another one sticking its oar in was not necessarily very deft.

I am not sure either that the chancellor should have celebrated that intervention so enthusiastically. The IMF is saying “heightened uncertainty” about the referendum is already hitting the economy and that Brexit itself would be a significant economic shock, with the potential for “severe regional and global damage”, according to Maurice Obstfeld, its chief economist.

But this apparently growth-damaging, risk-enhancing event has been created by the prime minister, with the full support of a chancellor whose long-term economic plan was supposed to take Britain away from danger. In this respect at least, you might argue, the economy would have been safer with Ed Miliband and Ed Balls.

The idea that Brexit uncertainty is to blame for the current period of weaker growth is not confined to the IMF. The Bank of England’s monetary policy committee (MPC) left interest rates unchanged at 0.5% for the 86th month in a row on Thursday.

In detailing that decision the MPC both outlined its view that “a substantial proportion of the recent fall” in the pound reflected referendum uncertainty, and that nervousness about the vote was weighing on growth.

As it put it: "There had been signs that uncertainty relating to the EU referendum had begun to weigh on certain areas of activity. Media references to uncertainty had jumped, though the impact of this on household spending was unclear. The likelihood that some business decisions would be delayed pending the outcome of the vote was consistent with the easing in survey measures of investment intentions, reports of the postponement of IPOs and private equity deals and a softening in corporate credit demand. The fall in commercial property transactions in Q1 had been particularly striking. Thus, there might be some softening in growth during the first half of 2016.”

It will surprise nobody that the Bank will be doing nothing between now and June 23. Whether it has to do anything afterwards, and particularly in the event of a vote to leave, it says it will “use its tools” to respond to what might be “an extended period of uncertainty about the economic outlook”. Osborne has talked about rate hikes but it could include interest rate cuts, even from 0.5%, reluctant though the Bank is to do that, and more quantitative easing, as well as emergency liquidity and other measures.

The EY Item Club, in its latest forecast out tomorrow, is also strong on the Brexit uncertainty point. As its chief economist Peter Spencer discussed here last week, it expects consumer spending to be less buoyant next year. Fortunately – on its assumption of continued EU membership – the cavalry will arrive in the form of stronger business investment.

“With the recent drag from uncertainty assumed to fade, companies are likely to resume their investment drive, putting their healthy balance sheets and high profits to good use,” he says. “This bounce back in business investment should more than offset the slowdown in the consumer sector.”

So we have a story here. The economy has slowed but a large part of that slowdown is due to pre-referendum uncertainty. Once that uncertainty is out of the way with a vote to remain, there will be other things to worry about, including the US presidential election, but growth should rebound.

It is a decent story, but it is not one we can be certain about. There is plenty of anecdotal and survey evidence that referendum uncertainty is having an impact but very little hard data. Recent weakness in manufacturing, exemplified by the problems in the steel industry, reflects fundamental rather than temporary factors, and is not just affecting Britain. Britain, as the IMF reminded us, is still in the process of fiscal consolidation – deficit reduction – with Osborne still hoping for that budget surplus. Global growth prospects, as the IMF also reminded us, have deteriorated a little in recent months.

We should not be too gloomy, but we should also not assume that with one bound we will be free to grow more strongly if there is a vote to remain. Ahead of the Scottish referendum in September 2014 there was a lot of talk of referendum uncertainty weighing on growth. But if there was a post-referendum bounce it was short-lived. In a picture admittedly complicated by oil weakness, the Scottish economy grew by just 0.9% between the fourth quarters of 2014 and 2015. All I can say is it would have been a lot worse with a vote for independence.

Is there a bigger uncertainty effect weighing on UK growth now than there was in Scotland then? We have to hope so, but it is by no means guaranteed.