Eleven weeks since the referendum and we now have enough economic data to support either side of pretty much any argument around its economic effects. Confused? Here are some things that we know for sure:
Ignoring the referendum (if that’s possible) the underlying position of the British economy is very strong.
Around the end of 2015 we were at the sweet point of the economic cycle, with job vacancies high, inflaton and unemployment both low, wages starting to rise but interest rates still at rock bottom. Even the government’s massive post-recession pile of debt was – at last – beginning to fall as tax receipts rose from a growing economy. This therefore is the baseline scenario; the question now becomes to what extent has the referendum taken the shine off it.
From early 2016 it began to be clear that business confidence, as reflected in private sector surveys, was being affected by uncertainty over the referendum result, not helped by some new year global jitters. This can now be seen in the fall in fixed investment quarterly GDP data that we have for the first half of the year and also a fall in the confidence levels of the purchasing managers indices in the first half of the year compared to 2014 and 2015.
Then, following the referendum result, the economy’s heart skipped a beat. Consumer and business confidence collapsed. And, given the importance of private spending to keep the economy growing, particularly since government spending remains constrained, economic forecasts were slashed too. But by the time we came back from our holidays, the world was no longer ending. In fact, the initial post-referendum data was so surprisingly good that the FT constructed a “surprise index” and reported it was high.
But if the immediate collapse in confidence was thankfully short-lived, there have also been other changes that are less easy to reverse.
The pound, which can be thought of as the crowd-sourced average of everyone’s views on Britain’s future economic prospects, is still down significantly. This has pushed up the costs of manufacturing, although offsetting this, exports are more competitive. Higher costs at the factory gate may in time feed through to higher prices in the shops, meaning the rising wages we have started to enjoy in recent years get eroded in real terms.
The economic cardiac arrest in July cannot be undone meaning the GDP figures for the third quarter will definitely be lower than if the referendum had gone the other way; a permanent loss of output for ever.
But perhaps more importantly, the sense of unease that had crept into decision-making from the new year has not gone away.
We can see this from the way in which the business survey data is back to where it was before the referendum, but still lower than last year. The unease has changed a bit: whereas in the first half of the year it represented the risk that came from not knowing which way the referendum would go, now it represents the risk from not knowing what it means.
What does all this imply? Because uncertainty is a real business cost, the challenge for firms is fully to internalise the implications for their businesses from various potential future changes to the UK’s trading relationships. The phrase ‘political risk’ used to be used by analysts to describe the concerns of firms working in emerging markets: it is now the new normal for Britain. There needs to be a real acceptance that now, in the UK, large decisions could be made by policymakers that affect the way they work. This means methodically working through the options rather than sitting worrying about them.
The implications for policymakers are similarly large. If we have been reminded of anything in the last couple of months it is that surprises feel dangerous. The best thing for the economy would be if the government could provide a clear path with associated timescales. If that is not possible, then an official list of the issues to be resolved would be a good start. It will be much harder for the government to achieve its massive policy agenda if it is simultaneously dealing with the hardships of a recession.
To keep things on track, the balance between ‘known unknowns’ and ‘unknown unknowns’ needs to shift back towards the former: we’ve had enough surprises for now, thank you.
As for households, as long as the government doesn’t look like it is messing things up as the political cycle gets back into swing, it seems likely that an immediate recession can be avoided. These means that in people’s everyday working lives, opportunities will feel like they are continuing to increase, not decrease (even if they are not increasing as fast as they otherwise might have). And of course, to the extent that people believe this, it becomes self-fulfilling.
In the longer-term the overall economic effect of Brexit will depend on many policy decisions that have not yet been made. And the changes to the economy will be structural, not cyclical, so similarly will take many years to evaluate. From the vantage point of now, around three quarters of the way through 2016, the best summary comes from Bank of England governor Mark Carney when he told the Treasury Select Committee on Wednesday that growth was likely to be ‘about half as much as it was prior to the referendum’.
And so we see the Brexiteers rejoicing in the lack of immediate recession, and the Remainers mourning the additional economic activity and opportunity that might otherwise have been.
This is an extract of Kitty Ussher’s analysis on the effect of the referendum on the economy; you can read her assessment of the state of things in full online on Portland’s dedicated Brexit website.
Measurement and evaluation