Was Brexit All a Storm in a Teacup?
WHY YOU SHOULD CARE
Because sometimes the alternative facts turn out to be correct.
Seven months on from the referendum that shook markets around the world, the sky still hasn’t fallen in on the U.K. Quite the opposite: The U.K. economy grew by 1.2 percent in the last six months of 2016 (according to an estimate released yesterday from the Office of National Statistics), despite official predictions that the country should be in the middle of a yearlong recession by now.
That’s not all. Since the June vote, both Snap and Google have decided to press ahead with new international HQs in London. Meanwhile, Japanese carmaker Nissan, one of the largest foreign employers in the U.K., has chosen to build its new model in the country. In fact, in 2016,
The U.K. had the fastest-growing economy in the G7.
In the buildup to the referendum, the U.K. Treasury published two high-profile reports, weighing in at a combined 291 pages, arguing firstly that, in the event of a Brexit vote, there would be an immediate short-term shock of between 3.6 percent and 6 percent, and secondly, that long-term growth would slow up to 9.5 percent by 2031. This doom and gloom prediction was broadly in line with other serious projections from the likes of the IMF, OECD, Deutsche Bank and Citi. While early signs aren’t all rosy — several large financial institutions have recently announced plans to move jobs from London to the Continent — predictions of imminent contraction have proven to be very, very wrong.
“The economy has grown at more or less the rate that had been anticipated on the assumption of no Brexit,” says Professor Iain Begg from the London School of Economics. Indeed, the government’s official economic forecasts (which come via an independent body that never weighed in on the potential outcomes of Brexit) now expect uninterrupted growth. Of the many key predictions made before the referendum, the only one to have been completely fulfilled has been a fall in the value of the pound, which is now filtering into increased inflation. But the devalued currency “is actually giving the economy quite a boost” by making exports more competitive, says Dr. Graham Gudgin from the University of Cambridge’s Centre for Business Research.
The economists with egg on their faces now suggest that the Bank of England’s immediate slashing of interest rates, from half a percentage point to a quarter, helped to allay the potential short-term crisis. “This is unlikely to have been quantitatively significant,” says Begg, but the swift signal, combined with a rapid transition of political power, helped to instill confidence.
A lot of the economic forecasting fraternity have got form here: They just keep getting things wrong.
Dr. Graham Gudgin, University of Cambridge
“The judgment now among many economists is that the Treasury went a bit over the top in its assumptions,” says Begg. Beyond the Treasury, “there was probably a bit of groupthink” at play in the overwhelming consensus from other established economic organizations, he says. Some even accuse them of politically exaggerating their numbers: “The whole world of respectable economics didn’t want the U.K. to leave, so everything was hyped up, which is becoming an embarrassment for those involved,” says Gudgin, the author of a recent report that lambastes the Treasury’s pre-referendum research.
(When asked about its pre-Brexit predictions, the Treasury did not comment directly. It instead referred OZY to the response of its head, Chancellor of the Exchequer Philip Hammond, to a similar question recently posed by another reporter: Hammond credited the “policy response to the referendum result” for bolstering consumer confidence and making the economy more resilient.)
Still, many economists now think that the Brexit downturn will bite in 2017, as inflation erodes consumer spending power and more companies finalize their investment decisions, before negative impacts on trade become more important in the medium to long term. “The analysis may well have been accurate but the timing awry,” says Begg.
Even in the case of the hardest Brexit, though, the Treasury massively overestimated the potential drop-off in trade, thinks Gudgin; it suggested that goods exports to Europe could fall by half. This “daft” projection “strains credulity,” he says: EU tariffs for external countries average 3 percent for nonagricultural goods, and given the 12 percent depreciation of the pound, these tariffs are “neither here nor there.” Gudgin’s model suggests that, in the long run, the fall in per capita GDP (after reduced migration is taken into account) resulting from Brexit will essentially be negligible.
But of course, “it’s far too early to draw any strong conclusions,” says Sir Charles Bean, the economist who reviewed and positively commented on the Treasury’s first report before its release. The departure from the EU hasn’t even begun yet, and so nobody really knows what is going to happen. “These are not normal forecasts,” admits Gudgin. “We’ve got almost nothing to go on because nobody’s ever left the EU before.”
As a result, economists on both sides of the debate are essentially performing educated guesswork. Most long-term forecasts give a range of predictions, from severe shock to virtually no impact. And to be sure, the only major forecast to have suggested that Brexit will be net positive for the U.K. economy is from the group Economists for Brexit — most economists are just debating quite how large the slowdown will be.
During the referendum campaign, leading pro-Brexit politician Michael Gove infamously declared that the British public had “had enough of experts.” The quote was instantly seized upon and ridiculed, potentially costing Gove his political future. He had continued: … Experts from acronym-bearing organizations “saying that they know best and getting it consistently wrong.” The jury’s still out, but it seems that the experts might well have been wrong after all.