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Brexit Britain muddling along

The scale of economic dishonesty in the wake of the Brexit result last year takes “fake news” to stratospheric levels.  In this, both sides of the Brexit argument are equally culpable.  The slightest hint of economic bad news is pounced upon by the “Remoaners” as proof that the UK economy is going to Hell in a handcart.  Against this, any manipulated government data that offers the slightest possibility of economic growth is waved in our faces by the Leave-fanatics at the Daily Mail and the Telegraph as evidence that leaving the EU was the smartest thing Britain could have done.

In reality, neither position is borne out by what has happened so far.  It is true that the Pound took a big dip in the immediate aftermath of the referendum result.  But is that necessarily a catastrophe?  A low Pound means more expensive imports which translate into inflation.  On the other hand, it also means that UK manufacturing companies get a boost from the cheaper price of exports.  This helps cut the UK’s current account deficit, making us less dependent on selling assets in exchange for foreign capital.

Shares tumbled for a bit.  But additional stimulus from the Bank of England helped to stabilise the situation; leading, eventually, to the FTSE 100 hitting record highs.  Is this a good thing?  Yes, if you happen to be a pensioner whose pension pot depends on a rate of return above five percent.  No if you are a business desperately seeking investment, since high stock prices suck capital away from investments toward unproductive assets.

Unemployment fell unexpectedly, giving comfort to those on the Leave side.  But official unemployment figures are now so distorted that they paint a false picture of what is really happening.  Dig beneath the headline figure and we discover that the number of hours actually worked has barely risen at all. The new jobs that have been created include too many zero-hours and part-time positions together with gig-economy and self-employment work in which many workers fail to earn enough to be paid the Minimum Wage.  In fairness, this is a trend that has been growing since the crash in 2008, so it cannot be blamed on Brexit either.

Consumer spending is high despite Remain campaigners predicting a collapse of confidence if Britain voted to leave the EU.  Once again, Leave supporters jumped on this as proof that we were right to vote to leave.  But again, dig beneath the headline figures and we find a less rosy picture.  First, an awful lot of that consumer spending has gone on imported goods and services – great for Asian economies, but a continuing drain on the UK.  More importantly, much of that consumer confidence is based on unsustainable house price inflation similar to what we experienced in the run up to 2008.  Unsustainable because both productivity and incomes have stagnated – coupled to the fall in the Pound, this means that the average UK consumer is worse off today than they had been in 2008.  So any faltering in the housing market could result in a rapid loss of confidence.

One reason why we should avoid making a connection between (good or bad) economic data and Brexit is quite simply that Brexit hasn’t happened yet.  We know it is going to happen.  But we have no idea what kind of settlement (if any) Britain and the EU will finally agree upon – we will have to wait until at least 2019 to know that, and there are an awful lot of non-Brexit-related events (such as the collapse of the North Sea oil industry) that could scupper the UK before that.

For the time being, the “muddling through” scenario presented by Chris Giles in the Financial Times looks most likely:

“The economy slows as household finances are squeezed by higher inflation, business investment is flat and trade receives only a modest boost from a weaker pound. The strong momentum in the economy at the turn of 2016-17 keeps growth high before a fall in the rate in 2018. Unemployment remains stable at about 5 per cent with wage increases not reflecting higher inflation.”

As Giles notes, while there are economists who predict both far more negative and positive scenarios;

“Most economists subscribe to a version of this view, which forms the basis of predictions by the Bank of England and Office for Budget Responsibility.”

Interestingly, in a recent presentation in Parliament, contrarian economist Steve Keen – one of the few economists to accurately model and predict the 2008 crash – also believes that the UK economy is unlikely to experience another major crash.  Rather, Keen argues that the British economy is set to follow Japan’s lost quarter century – a prolonged period of stubborn stagnation; very similar to Giles’ muddling through scenario.

Of course, nobody knows what is going to happen… and that’s my point.  Economic forecasting is notoriously difficult and usually less accurate than astrology – especially when arguments over Brexit are levered in.  Moreover, since it is impossible to build every potential event into the modelling, anything from the fairly likely prospect of Marine LePen winning the French presidency in May, the only slightly less likely possibility of Deutsche Bank going bust, to the highly unlikely possibility of an asteroid landing in Trafalgar Square would be sufficient to propel us into yet another economic crash.

In the absence of one or more of those “black swans” I’m with Giles – the UK economy will most likely keep muddling along… at least until it doesn’t.

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