Sunday, December 25, 2016
A year when all roads led to Brexit
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.

Well. I am spoilt for choice. Do I write about Donald Trump and whether his tax-cutting, infrastructure-boosting plans will mean a new dawn for the American economy? Or, as is also possible, that his protectionism and unconventional way of doing political business will hasten a new dusk for the world economy.

It is tempting. For the moment the conventional wisdom – and the view of the markets - is that good Trump will triumph over bad protectionist Trump, though the president-elect still has plenty of issues with China. We will only know for sure, of course, when he has moved beyond tweeting and into the White House. A sustained boost in US growth, which is what has been driving markets, would be very welcome if it happens.

Or, I could focus on the loss of a prime minister and chancellor, both of whom appeared to have established themselves as semi-permanent fixtures. David Cameron and George Osborne have not exactly disappeared from view but the political waters closed over them with remarkable rapidity, leaving them to ply their trade on the speaker circuit, and their successors made competent starts.

One day, perhaps, there will be a yearning for the Cameron-Osborne era. Even in the Tory party, perhaps especially in the Tory party, that day has yet to arrive. It may be some time coming.

How about the Bank of England and monetary policy? Mark Carney rendered himself permanently unpopular with some sections of the political community by warning that the result of the June 23rd referendum would have consequences, and then by acting on those warnings by leading the monetary policy committee (MPC) into cutting interest rates and further stimulus measures in August.

The reduction in Bank rate in August cut short one record – the longest period of unchanged official interest rates since shortly after the war – but established another. At 0.25% we now have the new lowest official interest rate in the Bank’s history, and that history stretches back to 1694. The rate cut was right at the time, though if the monetary policy committee (MPC) wanted to re-establish the position that rates can go up as well as down, it could do so by taking away that “emergency” August cut.

All roads, however, lead back to June 23rd, and the vote for Brexit. Whether Trump would have won in the absence of the Brexit vote I cannot say – it is certainly possible that it was a decisive factor – but everything else flows from it. Without the vote for Brexit, Cameron and Osborne would still be in power, and the Theresa May era would never have got started.

Without Brexit too, the Bank would not have cut rates. One of the questions for 2017 will be that, with the Federal Reserve plotting several more rate hikes following its move on December 14, and sterling likely suffer as a result, the Bank feels pressured to start following suit.

What is there to left to say about the Brexit vote? When, two years earlier, Scottish voters rejected independence, its referendum followed a well-worn script. The economic risks of going it alone outweighed the emotional and sentimental appeal of independence, particularly for older voters.

The Brexit vote turned this on its head, and notably for older voters. Control of EU immigration, and taking back economic control in general, just about trumped the economic warnings. Maybe those warnings were laid on too thickly, particularly by Osborne – for many his warning of a punishment “emergency” budget to follow a leave vote was the last straw – but this still broke the normal rules. People do not normally vote for a poorer and more uncertain future.

The arguments for staying in the EU, as set out here, weres not that it would suddenly reform itself into a dynamic region of strong growth but, rather that Britain had enjoyed the best of both worlds as a result of our often semi-detached membership, gaining from the single market and continuing to attract the lion’s share of inward investment without being encumbered by membership of the euro.

The figures spoke for themselves. Since the euro came into being in 1999, the Italian economy has grown by a cumulative 4%, which is astonishingly weak, compared with 21%-22% for France and Germany and a very strong 34% for Britain. Since the single market came into being growth in Britain’s per capita gross domestic product has exceeded that of America.

There was no reason why this outperformance could not have continued. The challenge, when Brexit is finally completed, which will no doubt be long after I have stopped writing this column, will be to replicate it on the outside. As things stand, the government is embarking on an exercise aimed at preserving as many of the advantages of EU membership as it can. The EU has an interest in ensuring that it does not preserve all of them.

What about the economy’s performance since the referendum? A smooth change of government, the long run-up to the triggering of Article 50 and the Bank’s actions kept uncertainty to a minimum and allowed growth to continue. Manufacturing and construction have struggled since June but services, and in particular consumer-facing services, have done well. Retail sales have boomed, at least on the official figures. The job market has slowed but not collapsed.

This was a period when, for Brexit supporters, any growth was better than no growth. The economy was unbalanced before and it has become more unbalanced since. The hard part, of course, is yet to come. Whether or not sterling’s fall will produce export-led growth which will offset the malign effects of higher inflation has yet to be seen. Whether businesses can be persuaded to keep investing, and recruiting, during what could be a bruising negotiating process is another central question.

These are issues for next year and beyond. For the moment, we should be pleased that the economy has so far help up well, and that the uncertainty associated with both the referendum and Trump’s victory in America were contained.

This is genuine. I hope we can make the best out of Brexit and I hope that American voters do not quickly come to regret electing Trump. Meanwhile, in this last column of 2016, I can also hope that things are as interesting next year as they were this. Maybe that is too tall an order.