“Project Fear” has been proved pretty groundless, argues Ruth Lea, CBE (Arbuthnot Banking Group). Since the Brexit vote, the UK economy has been more robust than expected. This cannot, however, be attributed to “better-than-predicted” world growth, she maintains. The world economy’s performance in 2016 and 2017 was, in reality, much as the IMF expected.
Former Commercial Secretary to the Treasury Lord O’Neill has recently conceded that the UK economy has been more robust than he had expected, given the Brexit vote. He has been quoted as saying, “I certainly wouldn’t have thought the UK economy would be as robust as it currently seems”, reportedly attributing the resilience to better-than-predicted global growth.1 Of course, I welcome his honesty, but I do question whether the “better-than-predicted” world growth has had as much effect on the UK economy as O’Neill implies. In the run-up to the Brexit vote (and in its aftermath) the IMF, for example, was expecting a pick-up in both global GDP growth and world trade growth. Granted, they have raised their projections a tad recently compared with pre-Brexit vote times, but not dramatically.
At this point, it is worth reminding ourselves of the Treasury’s paper concerning the immediate impact of a Brexit vote, released in May 2016. May I quote some highlights of “Project Fear”:2
“The analysis in this document comes to a clear central conclusion: a vote to leave would represent an immediate and profound shock to our economy. That shock would push our economy into a recession and lead to an increase in unemployment of around 500,000, GDP would be 3.6% smaller, average real wages would be lower, inflation higher, sterling weaker, house prices would be hit and public borrowing would rise compared with a vote to remain”.
“The analysis also presents a downside scenario, finding that the shock could be much more profound, meaning the effect on the economy would be worse still. The rise in uncertainty could be amplified, the volatility in financial markets more tumultuous, and the extent of the impact to living standards more acute. In this severe scenario, GDP would be 6% smaller, there would be a deeper recession, and the number of people made unemployed would rise by around 800,000 compared with a vote to remain. The hit to wages, inflation, house prices and borrowing would be larger. There is a credible risk that this more acute scenario could materialise”.
Fortunately, “Project Fear” has been proved pretty groundless. Briefly, growth has not collapsed, there has not been a recession. Unemployment has not shot up. On the contrary, it has continued to fall in, and in the three months to October 2017 the unemployment rate was 4.3%, the joint lowest since 1975. The economy has been remarkably resilient.
More specifically, GDP growth in 2016 is now estimated to have been 1.9% in 2016 and may have been around 1.8% in 2017. (The ONS releases the first estimate for 2017 on Friday, 26 January.) Granted sterling weakened after the Brexit vote, with knock-on effects for inflation and real earnings and hence household consumption growth. But having said, that household consumption probably grew around 1.5% last year. Whilst, this was markedly slower than in 2016 it was still reasonable. Gross fixed capital formation (GFCF) may have risen by around 3% last year, thus confounding expectations in some quarters that it would “collapse” in the wake of a Brexit vote. And the growth of exports of goods and services (as a component of GDP) may have risen by around 6% compared with a more modest (around 3%) increase in imports, contributing to an improved trade balance.
The improvement in the balance of trade has, of course, contributed to GDP growth in 2017. It may have contributed about 0.7% of the estimated total GDP growth (1.8%), with the other components contributing over 1%. How much of this improvement reflected the UK’s (much-needed) boost to competitiveness following sterling’s depreciation (part of which has now been reversed, incidentally) and how much reflected a stronger world economy is difficult to say at this stage. But, let us for the sake of argument, say it is roughly 50/50. Under these circumstances, the improved performance of the world economy may have contributed 0.35% to GDP growth in 2017. But this is not the end of the matter.
In the months running up to the Brexit vote, major forecasting institutions expected the world economy would improve. In April 2016, the IMF, for example, projected world GDP growth of 3.2% in 2016 and 3.5% in 2017, compared with 2015’s 3.1%. They expected, too, an improvement in world trade growth to 3.1% in 2016 and 3.8% in 2017, compared with 2015’s 2.8%. Granted these were not stellar projections, but there was some confidence matters would improve.3-4
Fast-forwarding to the IMF’s latest analysis (January 2018), the IMF estimated that world GDP growth was indeed 3.2% in 2016 and probably around 3.7% in 2017 (modestly higher than the April 2016 forecast).5 They expect growth of 3.9% for this year, so no major acceleration. Turning to world trade, the IMF estimated in January that growth was 2.5% in 2016 (weaker than expected in April 2016) but probably around 4.7% in 2017 (before easing to 4.6% in 2018). Trade growth was, therefore, about 1% stronger in 2017 than expected in April 2016. In reality, the world economy has behaved much as the IMF expected then, with relatively modest upsides.
Again, we cannot say at this point how much the better-than-expected world trade growth in 2017 contributed to the UK’s improving trade balance but, given an expectation of 3.8% in April 2016 and an outturn nearer to 4.7%, it would be extraordinary if it were very great. If indeed the improved world economy did contribute 0.35% to GDP growth in 2017 (see above), it can be argued that much of this should have been anticipated prior to the Brexit vote, given the IMF forecasts. And the world economy’s better-than-expected performance may only have contributed 0.1%-0.2% to GDP growth – if that. In conclusion, therefore, I find it difficult to accept the notion that a better-than-expected world performance has been a game-changer, as implied by Lord O’Neill. A contributing factor, yes, a game changer, no.
The key issue now is to address the factors, not least of all concerning domestic policies, that will support the British economy in future, given that Brexit is happening. Granted, we do not yet know the eventual terms of our new relationship with the EU, but I am optimistic there will be a positive UK-EU trade deal because makes economic sense for both sides. But, even if there is no deal and we trade with the EU under WTO rules, this is far from being a disaster. As we know, trade is driven by commercial reality and growing markets, as shown by the fact that our exports to non-EU markets have grown significantly quicker in recent years than to EU markets and the share of our trade to EU is in secular decline. Trade with the EU would continue. And growth would continue.
The article gives the views of the author, and not the position of LSE Brexit, nor of the London School of Economics.
Ruth Lea, CBE is Economic Adviser at the Arbuthnot Banking Group.
References
- BBC, “UK growth upgrade could ‘dwarf’ Brexit hit”, 22 January 2018.
- HM Treasury, “The immediate economic impact of leaving the EU “, May 2016.
- IMF, “World Economic Outlook: too slow for too long”, April 2016.
- IMF, “Subdued demand: symptoms & remedies”, October 2016, revised world GDP growth to 3.1% (from 3.2%) for 2016 and 3.4% (from 3.5%) for 2017 and world trade growth to 2.3% (from 3.1%) for 2016 and 3.8% (no change) for 2017.
- IMF, “World Economic Outlook, Seeking sustainable growth: short-term recovery, long-term challenges”, October 2017.
We haven’t left the EU yet. Let’s take a look at the Economy when we have no trade deals and the queues at Dover are 10 miles long.
The UK is still in the EU and growth has been sluggish despite EU recovery. I don’t think project fear has been proved completely wrong, the assumption was there’d be a shock (which proved incorrect but then again article 50 wasn’t invoked immediately). The actual impact seems to be more drawn out. The ‘shock’ could still happen if UK were to crash out of the EU without a deal.
As the previous poster has said. We haven’t left yet. Any good economic news now, is while we are still a member of the EU. Good luck when we leave.
There are a lot of “yes but’s” here. And some very optimistic assessments. It is reported elsewhere that GDP has grown by 1.5% in 2017. Far less than in the rest of the EU. The UK is lagging behind and you haven’t left yet!
I gather the ONS estimated 1.8% GDP growth for 2017, just as Ruth Lea said (“may have been around 1.8% in 2017”), indicating that Ruth Lea’s crystal ball is at least more closely aligned to the ONS’s crystal ball than Sue shuttleworth’s. Of course both Ruth Lea and the ONS may be wrong.
Since nobody has actually bothered to address the arguments made by Ruth Lea in her post, I suppose it is not in dispute that the Remain projection of an immediate economic shock just after a Leave vote was exaggerated. The three previous comments remind me of Jehovah’s Witnesses, who having predicted the End of the World in 1975, woke up on the 1st January 1976 still believing in the imminent End but without admitting they were wrong.
I don’t think it should be too big an ask for Remainers to admit that in this case, they were wrong. I also think it should not be too big an ask for them to admit that, although many of the Great and the Good were no doubt honest in their predictions of disaster after Brexit, some of them, for example civil servants working for a Remain government, international leaders to whom Brexit would be a serious disruption and university lecturers whose work would be affected more than most by an exit from the EU, may not have been entirely impartial in their judgment. After all, we’ve read enough Private Eyes and watched enough episodes of Yes Minister to be a little bit cynical, haven’t we?
That doesn’t mean I thnk Remain doesn’t still, probably, have the better arguments. I am for example baffled how anyone can believe that the EU in general, or German car makers in particular, would be likely to tolerate a situation where the UK can conclude a free trade deal with China, allowing someone in Belfast to Import cars tariff free, paint them red, white and blue, and export them without any controls across the NI border. But I think, if both sides were to show rather more honesty, it would do a lot to detoxify the Brexit debate.
My comment above was made before the reply from Sue shuttleworth, which I guess was still awaiting for moderation. So “nobody” and “the three previous comments” do not include her. Sorry for not being clearer.
If the German car makers are not tooling up to ditch fossil fuelled vehicles and switch to production of electric cars, their export of cars might be nil in ten years time. The Chinese and the British will then be laughing.
Clearly Ruth Lea has a problem with simple arithmetic which doesn’t coincide with her world-view. The facts are that UK GDP is currently on 1.4% while the EU, which Brexiteers derided very recently as being a busted flush, is on 2.2%, US 2.6% and the world in general powering ahead. We are the lowest of all developed countries, currently doing better than expected only due to economies of the rest of the world; however, if Brexit wasn’t happening who knows how much better we’d be doing.
*** p.s. i lived there 19 years***
I have to say Brexit has not happened yet lets see what happens when the tariffs go on and our products become difficult to sell which by logic has to happen they can not give us a deal without tarifffs as many other country’s would leave.
We have reaped the benifits of a lower pound which people have mistaken as doing better than expected lowering the cost of our products.
Also the london economic power house will be shattered with restricted access to europe this will mean many job losses.
The EU have already said they’d give us a tariff-free trade deal, i.e.a Canada-type deal.
London has been discussed ad nauseam for the last 3 years. It is currently estimated it will lose 5,000 jobs out of almost 400,000. It could get worse over time, or not as the case may be. London’s biggest threat is the rise of the east, so Hong Kong, Singapore and others are rising and threatening The City. Being in the EU breeds complacency and makes the city subject to the EU rules, which hates financial services. For London to compete internatioanlly it has to be outside EU control and free to innovate.
The whole article could be subsumed into “It could have been worse”. Not the strongest justification for the unfolding shambles. It could have been a damn sight better. Best performing G7 member to worst* in 12 months, high praise indeed.
*Bar Japan, can’t be bothered to check.
For most leavers the issue was sovereignty – freedom if you like. Some economic fallout was expected and to be lived with. ALL the arguments against Leave revolve around that staying is financially better. However that only really applies to the short term, longer term the EU is in relative decline and is pretty sclerotic.
Much of our economy is subject to EU rules but doesn’t actually trade there and for services there is no single market.
The EU is currently evolving form crisis to crisis and will either fold altogether or will have to go further down the route of a single centralised state (its ultimate goal). You cannot assume that Remain is keeping to the status quo because the EU is changing. You cannot assume the UK will retain all its opt outs into the future because as the EU evolves the real pressure to confirm will continue. We cannot simply veto everything because we damage the EU and our own standing. This is all fine if you are happy for a USE to form, but f you believe staying means we keep the best of all words then you are wrong.
So, despite the scare stories of project fear the UK has done quite well over the last three years and project fear forecasts don’t showing the eocnomy collapsing but continue with growth slower than the experts think it would have been. But its still growth not failure.
This article conveniently ignores not just the delay to triggering A50 but also the fact that the government’s fiscal targets were scrapped (forecasts were feeding in an austerity budget to try to keep to them if there was a vote to leave the EU) and interest rates were cut further. The adverse impact from the prospect of Brexit is being felt and Ms Lea does nobody any favours by trying to pretend that Brexit cannot be (democratically) reversed. It can.
– art 50 signed, sealed and delivered. no re-runs, no ‘didnt like the result lets ava nother one’ we are out. done and dusted. now just to get the best deal possible- if you wish to remain in europe- probably better to move overseas.