Saturday, December 01, 2018
In or out, we really need to shake things about
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.

When does a flurry turn into an avalanche? We have certainly had a flurry of economic assessments of the consequences of leaving the European Union in recent days. Any more and I will have to conclude that it is something more powerful.

Let me start today by offering a little guidance on the assessments we have had from the government, the National Institute of Economic and Social Research, the UK in a Changing Europe (UKandEU) and the Bank of England.

The first three look at the long-term consequences of Brexit under different scenarios; where the economy will be in 2030 compared with where it would have been in the absence of Brexit, looking purely at the impact of leaving the EU. The Bank’s assessment, which was drawn up to inform its banking stress tests, is different in that a short-term exercise, looking at only the next few years.

Two of the assessments, from the government and the Bank, would have been kept private if not for the insistence of parliament, and in particular the Commons Treasury committee. All show the economy faring worse than had Britain voted to stay in the EU, though by differing degrees.

To fill in a little detail. The National Institute, attempting to model the government’s proposed deal, finds that the economy will be 4% smaller under it than by remaining in the EU, with gross domestic product per capita down 3%. The UKandEU assessment is that GDP per capita will be between 1.9% and 5.5% lower than otherwise

The government’s assessment is that by 2030 GDP will be between 0.6% (the government’s proposed deal) and 9.3% (no-deal) lower compared with staying in. Its numbers are close to those of others for no-deal but flatter the government’s proposals by assuming that it will be possible to negotiate trade deals with many other countries as well as frictionless trade with the EU by 2030.

As for the Bank, it is not all doom and gloom. If parliament agreed on the government’s proposals, growth could be slightly better in coming years than it projected last month, though still weaker than it thought in May 2016, before the referendum.

The headlines it has generated relate to its “disruptive” no-deal (“tariffs introduced suddenly, no new trade deals, disruption in financial markets) and “disorderly” scenarios (border infrastructure cannot cope, EU trade agreements with third countries are not carried over and UK assets are sold off heavily). Under these, GDP falls by between 7.75% and 10.5% relative to the May 2016 growth path, and by 4.75% to 7.75% relative to the Bank’s latest forecast. This implies, as well as a deep recession and a big rise in unemployment, higher inflation, a sharp sterling sell-off and a 30% fall in house prices.

Would it happen? A lot of people have difficulty with the idea that in the circumstances the Bank would raise interest rates to 5.5%, from 0.75% now. There are plenty of reasons for it not to do so, most obviously a profoundly weak economy. But a sterling rout could also force the Bank’s hand and, for the purposes of stress tests, it cannot assume it would not do so.

So what do we know? We know, and have known since well before the referendum, that on its own Brexit will leave the economy smaller and British people poorer than would otherwise be the case. All credible analysis confirms this. If you make it harder to trade with your main trading partner and reduce economically beneficial EU immigration, your economy will suffer relative to the base case. There are gains from trade deals elsewhere but they are tiny by comparison.

We also know that if you take the Mad Hatter, a field full of March hares, a box of frogs and the pop group Madness, a no-deal Brexit is madder than all these combined. That should come as no surprise to regular readers. Those who talk blithely about flouncing off without a deal are engaging in the height of irresponsibility. Voters will never forgive the politicians who submit them to chaos, which provides a warning to the Tory party and an opening for Labour.

But, and there is a but when it comes to Brexit, we should be fully aware of what the material produced in recent days tells us. Lazily attacked as “Project Fear” forecasts by second-rate politicians who would not know a forecast if it bit them in the leg, and by economists who should know better, the scope of these assessments should be very clear.

As far as the government’s new assessment is concerned, it says on the first page of its executive summary, in bold letters: “This analysis is not an economic forecast for the UK economy”. It could not be clearer in saying that its analysis looks only at factors specific to Britain’s exit from the EU. The outlook, in other words, will be determined by more than just Brexit, including “future UK government decisions and responses”.

The Bank’s analysis, similarly, comes with the important caveat that: “Our analysis includes scenarios not forecasts. They illustrate what could happen, not necessarily what is most likely to happen.” “Our stress scenarios are not predictions,” said Mark Carney in his letter to Nicky Morgan, chairman of the Commons Treasury committee. A no-deal Brexit would be bad, though it might not pan out in precisely the way the Bank has set out; and it would be a surprise if it did so. But it is good that the Bank is prepared for all eventualities, in contract to its lack of preparedness for the financial crisis a decade ago.

And, as it also said in publishing these scenarios: “The economic consequences of Brexit over the longer-term will depend on the nature of the UK’s future trading relationships, other government policies, and ultimately the ingenuity and enterprise of the British people.”

That is the challenge. Assuming that we avoid the madness of a no-deal Brexit, the danger is that the economy slips into the slow growth projected by the Office for Budget Responsibility (OBR) over the next few years, averaging no better than 1.5% a year, and stays there.

The danger then is that, assuming we do leave the EU, we fall into a new “blame somebody else” culture. During 40-plus years of membership, the EU was often blamed for our own failings, a phenomenon that led us towards the Brexit vote. Now the danger, if it goes ahead, is that Brexit will be blamed; by Remain supporters who think it should never have happened, and by Leavers because it was not the pure Brexit they could never quite define.

Brexit has always been about making the best of a bad job, which Theresa May has tried to do so. Our long-term success depends, as the Bank says, on our “ingenuity and enterprise”. This means investment, invention, innovation, skills, productivity and the rest, and I am aware that these things trip more easily off the tongue than convert into practical action.

But such action will be needed to re-set Britain’s economy. And in coming weeks, the Brexit rollercoaster permitting, I shall try to set out how.