Damage was visible in 2017 and might become worse this year
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In 2017, the UK economy slowed, while the global economy strengthened. This suggests that the outcome of the referendum on EU membership in June 2016 has had the depressive effect “experts”mostly thought it would. This negative effect is likely to continue into 2018 and thereafter. The UK government must minimise the damage, not least by negotiating sensibly. But damage is certain. Moreover, Brexit is not the only danger to Britain’s prosperity. Analysis by the Financial Times argues that the value of Britain’s output is now about 0.9 per cent lower than was possible if the country had voted to stay in the EU.
That equates to almost exactly £350m a week lost to the economy. That sum is what Leavers promised would be available to the National Health Service. This post-referendum loss of economic output also implies a reduction of about £9bn in fiscal revenue. This drop will increase in the years ahead. The UK has also been forced to make a generous financial offer to the EU, to move, belatedly, beyond the first stage of the exit negotiations. The notion that Brexit would deliver a fiscal windfall was a mirage. Brexit is, instead, the gift that will go on giving fiscal headaches. In explaining the UK’s weak economic performance, the International Monetary Fund highlights how the vote has weighed on private domestic demand. In particular, “the sharp depreciation of sterling following the referendum pushed up consumer price inflation, squeezing household real income and consumption. Business investment growth has been lower than would be expected in the context of strong global growth and high levels of capacity utilisation, owing to heightened uncertainty.” This uncertainty casts a shadow into the future. Next year, suggests the IMF, growth will still be around 1.5 per cent. This is likely to put the UK in the basement of performance in the group of seven leading high-income countries, alongside Japan and Italy. The collapse in net immigration from the EU to the lowest level since records began makes this yet more plausible. Immigration of the hard-working young used to raise both gross domestic product and GDP per head. The government has to show greater realism and urgency in the Brexit negotiations next year if it is to reduce pervasive uncertainty and obtain a tolerable deal. But the rest of the EU believes that the UK remains unrealistic: it continues to misunderstand both the EU’s aims and the weakness of its own position. The hoped-for “bespoke deal”, aimed at squaring the circle between Leavers and Remainers, is almost certainly yet another mirage. Managing Brexit is, however, only one of the UK’s challenges. The economy suffers from at least two other difficulties. The first is political. The government is weak and divided, while the Labour opposition has fallen into the hands of those who wish to embark on a radical restructuring of the economy. The second is its structural stagnation: employment performance has been excellent; but productivity performance has been the absolute opposite. Alas, productivity continues to stagnate, while the rise in unit labour costs is accelerating. The nightmare would be not only continued stagnation of living standards in the long run but an inflationary wage-price spiral in the short run. That would compel the Bank of England to tighten sharply. The political risk (the prospect of a radical Labour government) might reinforce the economic risk (the threat of stagflation), via another big drop in sterling. One cannot feel complacent about the UK’s economic prospects in 2018 and beyond. Things will stay difficult.
This article originally ran in Financial Times
