Has the UK economy really shrugged off the impact of the Brexit vote?

Project Fear Mark 2 is unlikely to work, even if the pessimists are right in the long term.

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The predictions of many, perhaps most, economists about the immediate impact of Brexit have been disproved. I don’t just mean George Osborne’s “Project Fear”, with its counterproductive scaremongering about an “emergency” tax-raising budget – which many of us ridiculed at the time – but the broader fears that Brexit would lead to an immediate crisis of confidence in the UK economy, with severely negative impacts.

Although there was indeed a big drop in business confidence after the referendum, it quickly recovered. And while the pound did fall sharply – as the Treasury and virtually every mainstream forecaster expected – it stabilised and has since recovered somewhat (especially against the falling dollar). Meanwhile, employment is at a record high, and manufacturing is doing better than it has for years, boosted by the global recovery and sterling weakness.

Against this, it must be said that after sterling fell, the resulting rise in inflation has hit real consumer spending. Real wages – which were rising at the time of the referendum – have fallen over the past year. 

So how should we assess today’s growth figures, which show that the UK economy has expanded by just 1.5 per cent over the past year. Not great, but we’re not in recession, or anywhere near.  So has the UK economy really shrugged off the impact of the Brexit vote?  Hardly. As the chart shows, the UK’s economic performance in the run-up to the referendum was resolutely average, tracking the average growth rates of other advanced economies closely.  Since then, growth here has been at best sluggish, while it has accelerated considerably almost everywhere else.

As the International Monetary Fund said last week, this is the “broadest synchronised global growth upsurge since 2010” – except in the UK.  It simply isn’t credible to argue, as some do, that there’s been no hit to growth. A comprehensive analysis of pre-referendum forecasts by the Financial Times suggests – very much as my chart does – that so far, we’ve lost just under 1 percent of GDP compared to what otherwise would have happened. 

None of this should blind us to the bigger picture. In reality, there is probably less reason to be optimistic about the longer term economic impacts of Brexit than there was before the referendum. Then, many analysts, assuming that politicians will behave at least somewhat rationally, predicted that even if we voted for Brexit we would still end up remaining in the single market or something very similar. 

But the government’s red lines – on freedom of movement and the European Court of Justice – will leave us firmly outside both the single market and the customs union.  That, in turn, means considerable disruption to the UK’s relationship with our biggest trading partner. We don’t know how much damage that will do – credible estimates range from 3 per cent of GDP up to 8 or 9 per cent, over the next 15 years or so – but even that probably understates the uncertainty involved.

Of course, if economists got the short term so wrong, why should we trust them for the long term? Well, weather forecasting is pretty unreliable more than a week or so in advance. But that doesn’t mean that we don’t know that increased greenhouse gas emissions will lead to a significantly warmer planet, even if there’s plenty of uncertainty about how much warmer.  Similarly, we know that tariffs and non-tariff barriers have an impact on trade, investment and productivity. We can be much more certain about the long-term impacts of Brexit than we can about the short-term impacts resulting from confidence and uncertainty.  

So if you ask me what will happen over the next few months, my central scenario is that growth will remain sluggish, but the strength of the global recovery will mean that things get no worse, and some parts of the economy – especially those dependent on trade – could do better.  But, as Brexit approaches, could its impact become much more severe?  Well, if we don’t quickly negotiate a transition deal, then businesses are likely to get increasingly worried about the possibility of a “chaotic Brexit” in March 2019.  If negotiation break down, on this or on Ireland again, then it will be even worse.  This could – emphasise could – have a far greater effect on the economy than the original vote.  But frankly that’s just my opinion, as a reasonably informed observer. It’s not really based on economics – either theoretical or empirical - and, as with pre-referendum views, might easily be wrong. 

And what does that mean for the politics of Brexit, where crucial decisions will be made over the next few months? Many of those pressing for a softer version, or even a reversal of the decision, have been secretly hoping for a sharp slowdown that would change the public’s views on Brexit. The latest figures show that Project Fear Mark 2 is unlikely to work. Instead, opponents of a hard Brexit will need to make the argument properly that an outcome along the lines favoured by the government will be deeply damaging to the UK, economically and politically, over the longer term. As Anand Menon, director of UK in Changing Europe, says, they need a story – not a nightmare

Jonathan Portes is Professor of Economics and Public Policy, King’s College, London, and member of Global Future's advisory board