Britain’s departure from the EU will set the economy on a new path that some economists think will improve its prospects, adding a one percentage point to the nation’s growth rate by the end of the year.
Others fear that the certainty of a worse trading relationship with the bloc in 2021 will mute any bounce gained by removing the threat of a no-deal departure, leaving the economy stuck in second gear, persistently hamstrung by Brexit.
Under Boris Johnson’s Withdrawal Agreement, which comes into force at 11pm London time on Friday, the UK has negotiated an 11-month standstill transition that maintains existing trading arrangements between Britain and the EU.
But while the UK’s exit from the bloc, confirmed by Mr Johnson’s decisive election victory last month, has brought a greater degree of certainty for businesses and consumers, the longer-term picture will hinge on the sort of trade deal negotiated between Brussels and London by the end of the year.
Echoing Sajid Javid, chancellor, who has talked of “a boost to economic confidence” that he expects to result in “more investment decisions and job creation”, Julian Jessop, a fellow at the Institute of Economic Affairs, said: “There will be a Brexit bounce.”
He predicted that improvement in sentiment, higher business investment and a rise in sterling easing household finances would all contribute towards “1 per cent more growth than otherwise”, raising the annualised rate of growth by the end of the year back above 2 per cent.
The broad optimism of Brexit-supporting economists is countered by their opponents, who are rather larger in number. John Springford, chief economist of the Centre for European Reform, said the expectation of a big improvement in the economy from Brexit was “silly”.
“The story that now you’ve got certainty, investment comes flooding back [doesn’t work],” he said, “because what you’ve got certainty about is a pretty hard outcome”. This would depress activity at companies dependent on free movement of people or frictionless goods trade, he added.
Probe a bit deeper, however, and these starkly divergent views come much closer together. Economists of all convictions know that there are many uncertainties over Britain’s departure, many other moving parts in the global and domestic economy and distinguishing the precise Brexit effect at any time in 2020 will be monstrously difficult.
The prospect of a large public spending stimulus from the middle of the year and a global economy that is struggling to improve amid continued trade tensions and potential new threats such as the coronavirus make firm predictions harder still.
The scale of any Brexit bounce also depends crucially on how the hit that the economy took from the 2016 Brexit vote is measured: the greater the estimated damage, even if temporary, the more the potential gains from renewed certainty.
Economists do not agree on the extent of the damage, with estimates varying from 1 per cent of gross domestic product (£340 per person every year) to about 3 per cent (£1,000 per person).
To help them get a better understanding, they all agree that one of the main causes of these losses was the fall in the value of sterling after the Brexit vote, which raised import prices and inflation but not wages. A new working paper from the Centre for Economic Policy Research estimates that the Brexit vote “increased consumer prices by 2.9 per cent, costing the average household £870 per year”.
This cost would decrease if the pound recovered, lowering prices. So far, however, sterling’s effective exchange rate against the UK’s main trading partners — at 80.7 — is only 3.5 per cent higher than its average after the 2016 referendum, and still 8 per cent lower than its average in the three years before the vote. Unless it rises much further, the gains are likely to be relatively small.
The hit to business investment is the second big effect economists agree was affected by the vote to leave. The Bank of England has estimated that the effect of Brexit has been to drive down business investment to 11 per cent lower last summer than it otherwise would have been.
But because this form of investment represents only a tenth of total GDP, the country’s investment slump as a whole would need to be reversed to provide an estimated 1 per cent boost to the growth rate for a year. That, Mark Carney, BoE governor, has repeatedly said, is unlikely because even in an orderly Brexit “some of that [investment] will not come back, the opportunity has been lost”.
Allan Monks, UK economist at JPMorgan, says there is likely to be some boost from improved sentiment but it is still wise to be cautious. Even though the optimism component of business surveys such as the CBI industrial trends report jumped last week following the election, Mr Monks said “looking at the longer-term indicators in business surveys such as investment intentions shows they are still subdued”.
Much will depend not on business, but the consumer, and the news since the December election on the high street has been poor. Retail sales were weak in November and January, and a flat CBI’s distributive trade survey in January showed no Brexit bounce. Despite record employment rates and a better year for wages in 2019, households are not yet obviously feeling flush.
With consumers not spending quickly, the economic data are therefore unlikely to pick up until the spring at the earliest, leaving the politicians continuing to promise a Brexit dividend but probably unable to point to hard evidence until the second half of the year, if at all.
Source: Economy - ft.com
