Some said voting Leave back in June 2016 would be like jumping off a cliff as far as the British economy was concerned. In fact it’s been a leap into the void with a makeshift parachute. The descent has been rather gentle, certainly relative to some of the forecasts of an instant recession. Yet it’s nevertheless been a descent. The direction has still been down.
British job creation has been resilient since the referendum vote 15 months ago. Yet consumers have been squeezed by a nasty spike in inflation stemming directly from the record plunge in the pound on the night of the referendum.
Average wages, adjusted for inflation, are shrinking again. The slump in sterling has done disappointingly little for UK exports, relative to previous major devaluations. Imports have risen just as fast. Overall GDP growth has slowed markedly to just 0.3 per cent in the latest quarter. Adjusted for UK population growth our national income is essentially flat-lining.
The counterfactual makes all of this worse. The world economy has picked up this year. This includes the eurozone (which grew at double the rate of the UK in the second quarter). One would normally have expected the vigour in our major export markets and the fact that domestic credit remains extremely cheap to have stimulated investment by UK-based firms as managers seek to capitalise on the firming of overseas demand. Yet, instead, we are stranded in the investment doldrums. Rather than expanding, firms are sitting on their hands even more doggedly than usual, with many citing the uncertainty created by Brexit.
The Government has tried to lift some of that enervating uncertainty. Brexit hardliners in the Cabinet have mercifully capitulated to reality and now accept the need for a “transition” deal with the EU after 2019, while we attempt to hammer out a broad free-trade deal. They have even recognised that this will come at a cost in terms of continued payments into the EU budget and freedom of movement for EU citizens. We now seldom hear foolish “no deal is better than a bad deal” talk, at least from ministers. We’re informed that 29 March 2019 – Brexit day – will be almost identical to the day before for firms in terms of the regulations, tariffs, travel rules and customs checks they face.
Yet even establishing the transition will prove much harder to agree than ministers currently realise, leaving scope for a breakdown of talks and the two-year Article 50 clock to run down to nothing with no settlement. What happens then is anyone’s guess.
And even if we do get a short-term deal, what would we be “transitioning” to? A series of government position papers on customs, the Northern Irish border and product regulation published over recent weeks contain more wishful thinking than a child’s letter to Santa Claus and more black holes than a Stephen Hawking lecture. And we have not yet had the paper on financial services – the biggest contributor to our services trade surplus.
Meanwhile, all the long-term structural ailments of the British economy remain unaddressed. Vocational training is failing to deliver young workers equipped with the skills the economy needs. There is chronic underinvestment in new capital by firms, whose often bonus-driven managers take a damagingly short-term view. We are not building enough new homes, putting huge pressure on housing costs.
Our oligopolistic banks will happily lend for mortgages, but not to finance small firms. There are extreme regional disparities. While the UK economy is a job-creating machine a large share of those new posts are low-paying and precarious. This all must be part of the explanation for the collapse in our national productivity growth. The level of the UK’s output per hour worked is no higher today than it was 10 years ago on the eve of the run on Northern Rock.
We have high levels of income and wealth inequality. Planned government cuts to welfare over the coming years will make this still worse. And an extension of the squeeze on public services, including the NHS and social care, will cause further misery for those who rely on and work in them.
The solutions to all these economic problems lie in politicians’ hands today. Contrary to the delusions of some on the left, the EU does not prevent us addressing them. Germany’s first-rate apprenticeship infrastructure ensures all its young workers are trained to a good standard. France has significantly higher productivity than the UK. Sweden has lower inequality due to higher income taxation. Finland has relatively affordable housing. All of these countries are within the EU. To put it simply: there is no economic question facing the UK economy to which Brexit is the answer. But Brexit is what the Government is devoting itself and virtually all its resources to delivering.
All credible economic studies suggest that in the longer term weaker trade links with our EU neighbours will make us worse off – and that any new trade deals we might conclude independently with other countries are most unlikely to offset the damage. And those trade links will indeed be weaker if we are not in the EU’s single market of regulatory harmonisation. Otherwise, what would be the point of the single market?
The crucial political and economic question is whether the majority of those who voted Leave last year believing that it would be good for their living standards and for the economic opportunities of their children will realise that Brexit is not delivering – and was never going to deliver – what they hoped for. And whether it will, by then, be too late to change course. Is it possible to scramble back up the cliff?
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