Sunday, February 03, 2019
Bogged down in Brexit while the economy festers
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.

It is sometimes said that the gulf between businesses and ordinary folk has never been greater. People do not necessarily think that what is good for firms is good for them. An annual survey by Edelman, the public relations firm, just updated, found that 52% of people don’t think the way business is done is good for society, though they are even more damning of government.

On one thing, however, businesses and households are united. They are all feeling gloomy, thoroughly cheesed off with politicians and fed up with a Brexit process which goes around in ever decreasing circles.

I sympathise with that. As a news junkie, I will listen to pretty well everything but rarely have I used the off button more than in recent months. And don’t get me started on Question Time.

Anyway, the ICAEW, the Institute of Chartered Accountants in England and Wales, produces a reliable quarterly survey of business confidence, which I follow. It latest, for the first quarter, will be published tomorrow but I have had a sneak preview.

It shows that confidence has fallen to an index level of -16.4, the lowest since the economy was mired in recession 10 years ago during the global financial crisis. As the ICAEW demonstrates, confidence is closely linked to the politics of the Brexit process.

Its survey came too late to encompass the latest parliamentary votes but they will have done nothing to bolster confidence; dead-ends tend not to. The gloomiest sectors in the survey are retail and wholesale, followed by property and construction.

Its results are consistent with growth slowing to a crawl, just a 0.1% rise in gross domestic product this quarter, alongside a sharp slowdown in investment. More on that in a moment.

I said businesses and consumers are at one on this. The latest GfK index of consumer confidence was at -14 in January, the same as in December but five points lower than a year earlier and lower than in the immediate aftermath of the referendum. Households are now experiencing real wage increases again, according to official figures, and unemployment has not been this low since the mid-1970s. With inflation also coming down the “misery index” (the unemployment rate plus the inflation rate) is at low levels. People should be quite optimistic.

They are, however, worried about the future, and particularly about the economic outlook. A net 39% of people think the economic situation will get worse over the next 12 months, the gloomiest people have been on this for seven years, and approaching the level of concern we saw during the financial crisis.

The uncertainty that is driving down confidence will eventually lift. The House of Commons version of the withdrawal agreement that Theresa May will take to Brussels has little chance, but a version should eventually emerge that satisfies both sides and parliament. When that is, and how long an extension of the Article 50 timetable will be required beyond March 29 remain open questions. The risk of a no-deal Brexit is higher than it was before last week’s votes and is of great concern for business, which found the latest political shenanigans as unhelpful as any we have seen.

Getting beyond all this remains the challenge. Businesses complain that, because of Brexit, nothing else is happening, particularly in government. They are being asked to reassure customers while being offered nom reassurances or certainty themselves.

It cannot go on like this. Brexit has already given us three wasted years. If that continues into the next phase of talks – assuming there is a next phase – and it is allowed to dominate everything else, the damage will be compounded.

On this, I make no apology for returning to productivity, a pet subject of this column. There was a glimmer of hope just over three years ago, in 2015, that we were finally emerging from the tunnel of stagnant productivity. In the middle of that year, put per hour rose by nearly 2% compared with a year earlier, close to pre-crisis norms.

But we have had a relapse. Productivity in the latest 12 months is up by just 0.2% and, because of its intimate links to prosperity and living standards, not to mention competitiveness, that has to be bad news.

The National Institute of Economic and Social Research, Niesr, will this week devote a large chunk of its quarterly review to the productivity theme. There is not space here to feature every article but one, “The Anatomy of UK Productivity”, by Philip Wales of the Office for National Statistics, offers some useful insights, drawn from the data.

It shows that not all sectors have seen productivity slow in recent years but that about two-thirds have. Some of the sharpest slowdowns, worryingly because they are often regarded as jewels in our industrial crown, have come in telecommunications and pharmaceuticals. Textiles is another big slowdown sector. So too is financial services, another important sector of the economy. Though Wales does not say so, some of its slowdown reflects tougher post-crisis regulation.

What he does say, citing other researchers, is that “the slowdown in productivity growth derives in large part from the slowdown in a number of industries: notably the finance, manufacturing and telecommunications industries”. Fix those and you will be significantly closer to solving the productivity problem.

A second broad conclusion is that, while other countries appear to suffer from the “zombie” problem – keeping too many low-productivity firms in business – this seems ot be less the case in Britain. The problem here has been that many businesses which went into the crisis with high productivity emerged from it with lower productivity. The “zombies”, the exisiting low productivity businesses, actually declined in number.

A third result, which chimes with other research, is that foreign direct investment (FDI) is a key productivity indicator. This is a two-way street. Both foreign-owned firm that have invested in Britain and British firms that have themselves invested in other countries have much higher productivity than other businesses.
Median productivity for these FDI businesses is 114% higher than for other firms. Mean productivity per worker is a staggering 257% higher.

Finally, trade is an important driver of productivity. Taking firms which engage in international trade in goods, Wales and colleagues find that they are 70% more productive than non-trading companies. Adjusting for size of firm, FDI and other factors, traders were still 20% more productive than non-traders.

None of this necessarily provides a complete solution to the productivity puzzle but it offers a way forward. Whatever future we have it has to be one in which trade freely flows and we encourage more firms to trade. And it is one in which FDI has to be encouraged to move across borders.

A closed economy will become a permanently low productivity economy, with low economic growth and stagnant living standards. That is the danger, and the more we get bogged down in a messy Brexit the bigger that danger will be. There is a route map to higher productivity and prosperity, if anybody has the vision to follow it.