​Brexit: The economic forecasts

​By Michael Roberts and Heiko Khoo
0 Comment(s)Print E-mail China.org.cn, January 10, 2019
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British Prime Minister Theresa May leaves 10 Downing Street to attend the Prime Minister's Questions in London, Britain on Dec. 19, 2018. [Photo / Xinhua]

With British Prime Minister Theresa May's Brexit deal with the EU for her country to leave the European stage in late March seemingly in tatters, the question arises of the economic impact on Britain under the various options now opening up.

Her deal with her EU colleagues envisages a transition period to December 2020 while the two sides discuss a permanent trade agreement. If, as is expected, parliament rejects the deal when it finally comes to a vote – following one postponement already, with another always possible – then either the U.K. will leave the EU in March without a deal, its departure may be suspended and parliament could call a second referendum to reconsider the entire issue.

Brexit has already had a detrimental impact on the economy. However, in the 2016 referendum the Remain campaign was labeled "Project Fear" over its prediction that a leave vote would lead to the collapse of the economy and a deep recession. This view was strongly promoted by the Conservative government under David Cameron, its Liberal Democratic coalition partners, the right-wing of the Labour party, the City of London and big business.

On the other side, the anti-immigrant UKIP party and the right wing of the Conservative Party claimed that leaving the EU would save £350 million a week, which could then be spent on vital upgrades to the ailing National Health Service. In addition, it was claimed, trade would flourish as Britain, freed from EU restraints, would be free to trade with the world.

Neither view was correct. The economy has not slumped dramatically, nor there will be any Brexit dividend. The vote to leave in 2016 was followed by a sharp fall in immigration, hitting the health service and agriculture, sectors strongly reliant on foreign workers, especially in manual jobs Britons spurn.

Uncertainties and interminable squabbling have been accompanied by a sharp slowdown in the country's economic expansion. British business has been reticent to invest and foreign investors are weary of holding British financial assets. Sterling's value has dropped about 20 percent.

Britain's trade deficit with the rest of the world has widened to around 6 percent of GDP; and real GDP growth has fallen from over 2 percent to below 1.5 percent a year, with industrial production crawling along at 1 percent. Whereas the U.K. economy was doing better than most other top economies in 2015, now it's doing worse than Italy, inflation picking up due to devaluation of the currency.

Higher inflation and slower economic growth have hit most British households hard. Real wage growth vanished in 2017 and 2018.

Above all, from the point of view of British capital, business investment stagnated as companies held back on their investment plans awaiting clarity on the Brexit deal, and the dire predictions have been revived. Bank of England economists calculate that under a "no deal" Brexit the economy could shrink 8 percent in 2019, while interest rates would rise to 5 percent to protect the pound and guard against rampant inflation. Home prices would fall by up to 30 percent.

This would constitute a bigger decline than during the 2008-9 global recession, although many would welcome falling house prices, as in London and its surrounds they are beyond the reach of most people.

Capital Economics researchers are less pessimistic but still estimate that a "disruptive no-deal Brexit," where the U.K. and the EU do not cooperate, could take 3 percent off Britain's expected national income by 2020 and may produce "an outright recession."

However, a "managed" no-deal scenario – where the two sides seek to minimize disruption in key areas – would only involve a pause in economic growth in 2019 and a 1 percent hit to gross domestic product by 2020. Oxford Economics estimates that in this "managed scenario" the economy would "flirt with recession" in 2019 and GDP would be 2 percent lower than its current baseline forecast by 2020.

If a "transition deal" is accepted, there will be two years of uncertainty for British business, while a future trade deal with the EU is negotiated. And, the complexity of this process might entail extending the transitional period to 2022.

If we assume a transition deal is in place and that some long-term trade arrangement is reached with the EU, what are the future prospects? Europe is the main trading partner, accounting for about 57 percent of British goods trade and 40 percentof its services trade.

Most long-term forecasts, including those of the Bank of England and the U.K. government, estimate an accumulated loss in real GDP compared to its potential over the next 10 to 15 years of between 4-10 percent. It depends on whether the U.K. remains in a customs union (with similar tariffs and border regulations) with the EU and what parts of the Single Market (freedom of movement of labor and capital and citizens' rights) are preserved.

No matter whether there is a deal or not, the U.K. economy will be no smaller in 10 years' time if it leaves the EU, but it will grow more slowly. Current average U.K. growth has been about 2 percent a year since 2010, compared to 2.6 percent a year before 2008. Most forecasts for all scenarios predict growth of between 1.3-1.6 percent a year. This would constitute a significant loss but not a disaster.

However, all the mainstream forecasts assume a generalized world economic crisis won't occur over the next 10-15 years. If the U.K. economy experienced another crisis like 2008-9 this would deliver much more long-lasting damage to national income than a no-deal Brexit. Over the last decade, Britain experienced a permanent relative loss in GDP of over 25 percent.

In other words, the economy has seen average growth about a quarter slower since 2008 than it did before. Even if it continued to grow at around 2 percent over the next 10 years with no impact from Brexit, that relative loss produced by the Great Recession will reach 40 percent by 2030. That would be four times worse than any Brexit scenario.

Britain already suffers from weak investment and productivity growth compared with the 1990s, and with other OECD countries. It has become a "rentier" economy heavily dependent on its financial and business services sector – likely to fall dramatically after Brexit.

Many banks, insurers and asset managers have already redirected hundreds of millions of pounds of investment towards new or expanded hubs inside the EU. Nearly 40 banks from London have applied to the European Central Bank forlicenses. According to a study by the consultancy group EY, about £800bn in staff, operations and customer funds have already been moved to Europe by financial services companies since 2016, threatening to turn from a trickle to a flood.

Heiko Khoo is a columnist with China.org.cn. 

For more information please visit: http://china.org.cn/opinion/heikokhoo.htm

Opinion articles reflect the views of their authors, not necessarily those of China.org.cn.

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