Why this economist is also a Brexiteer
My name is Julian and I voted ‘Leave’. There, I’ve said it. For a professional economist in today’s Britain, this is close to heresy. Those of us who think that the UK is likely to be better off outside the EU have been compared (and not in a good way) to climate change deniers. It’s even been suggested that it is impossible to be both a proper economist and a Brexiteer.
Admittedly, the main reasons why I voted to leave the EU might be described as ‘political’ rather than ‘economic’. I saw the 2016 referendum as a once-in-a-generation opportunity to escape the slide towards a European super-state. The President of the European Commission, Jean-Claude Juncker, has at least been refreshingly honest about his desire to create an ever-closer union. Indeed, he would like a Banking Union, a Capital Markets Union, a Defence Union, an Energy Union, a Security Union… extending the reach of the EU into every aspect of our lives. No thank you. I am happy to think of myself as European, but Europe and the EU are not the same thing.
I’m also willing to concede that the vote to leave the EU means that the UK economy is now a little weaker than it would otherwise have been. The fall in the value of the pound has undoubtedly raised the cost of imports, adding to the squeeze on real wages and undermining consumer spending. The uncertainty about the future economic relationship with our largest trading partners is also holding back investment.
But that is it. Everything else is all still to play for. Yet large parts of the economics commentariat are convinced that Brexit will inevitably leave the UK much worse off and that it is irresponsible, even mad, to dispute this. In all that, there are many things which wind me up.
For a start, there’s the failure to acknowledge that the UK economy has performed a lot better than the consensus predicted. Looking back, it is easy to forget that many forecasters predicted that the economy would slump in the wake of the Brexit vote. In the event, just about the only thing that they got right was the fall in the pound. Even then, they failed to appreciate that this would support business confidence (especially among exporters) and boost asset prices (especially equities).
Crucially, most forecasters made the mistake of assuming that consumers and businesses would take the same negative view of the long-term impact of Brexit as the ‘experts’ and therefore cut their spending immediately. This was, I suppose, an internally consistent approach, but never made much sense when a majority of the public had just voted for Brexit and presumably saw it more positively.
Of course, perhaps the doomsayers only had the timing wrong. It might just be that the more pessimistic economists jumped the gun in predicting an immediate slump. After all, Brexit has not happened yet. Perhaps the slowdown in growth this year is the first sign of the inevitable recession?
But some perspective is surely needed. Brexit has not been the only factor. The rise in UK inflation reflects a recovery in global commodity prices as well as the decline in sterling. Household finances were already stretched and Brexit may just have brought forward an inevitable adjustment. And while the UK economy has been growing more slowly than the rest of the EU, the difference is nowhere near as marked as in 2012, when the UK recovery continued even as the debt crisis in southern Europe dragged the euro-zone into outright recession. Even today, unemployment in the UK is less than half the rate in the single currency area.
What is more, there are good reasons to expect UK growth to pick up again in the second half of this year and in 2018. Indeed, the monthly data and surveys already suggest that the economy is regaining momentum.
Thinking first about inflation, the pound has now been relatively stable (on a trade-weighted basis) for the last 12 months, so the upward pressure here is fading. The labour market also continues to tighten, private sector pay settlements are rising and it looks inevitable that the cap on pay in the public sector will be raised too. A combination of lower inflation and faster growth in nominal wages should therefore help real incomes and spending to recover.
As for investment, much will depend on the progress of the talks in Brussels. But reduced fears about a cliff-edge Brexit and the long-term relationship with the EU should reassure businesses and encourage cash-rich firms to look again at new investment projects. Industry has already welcomed the Prime Minister’s support for a two-year transition period in her Florence speech.
There are also signs that the UK is willing to take a flexible approach on migration after Brexit – one of the major risks to growth that underpin the more pessimistic forecasts. It is now widely recognised that large parts of the economy – from agriculture to the NHS – would benefit from some continued access to workers from the rest of the EU.
Looking forward, then, there is all still to play for. Many respectable economists who backed Leave acknowledged the risk of a temporary period of economic weakness due to Brexit uncertainty. But some of the gloomier claims that Brexit has ‘already’ cost the UK so many billions of pounds, or that the economy ‘will be’ X% smaller, are particularly galling. These forecasts are just that – only forecasts. They also typically come from the same sources, using the same pessimistic assumptions, as those whose predictions have been proved so wrong over the last year.
As for the long term, the consensus takes it for granted that the hit to UK exports to the EU will swamp any gains from more open trade with the (faster growing) rest of the world and from the chance to rethink regulation at home. Perhaps this is right. But I believe it will be proved wrong.
The downside can be minimised by a well-managed transition period leading to a new and comprehensive free trade deal with the EU. The upside can be maximised by cutting tariffs on imports, unilaterally if necessary, and escaping the madness of EU projects such as the Common Agricultural Policy. It surely is not that difficult to think of scenarios where the gains will more than offset any losses.
To be clear, the future is uncertain. Politicians and bureaucrats could still muck things up, or we may be blown off course by shocks from elsewhere in the world. But I am happy to go against the pack and predict that the UK economy will grow more quickly next year than this, and go on to thrive outside the EU. In the meantime, though, I expect the Spanish Inquisition to remain on my case.
Julian Jessop is Chief Economist at the Institute of Economic Affairs, but the views expressed here are not necessarily those of the IEA.