Economists are united by one thing in the wake of the troubling GDP figures: Brexit will make them worse

Boris Johnson’s ‘boosterism’ is intended to counteract the negative shock of leaving the EU – but haphazardly shaking the ‘magic money tree’ will not be enough

1996 sketch from Bremner Bird and Fortune sees characters appear to predict Brexit

Taken by itself, a 0.2 per cent contraction of UK GDP between April and June would not be a major concern. But the alarm bells should be ringing with the Office for National Statistics (ONS) alerting about a “slowing in the underlying figures” combined with concerns about the government’s economic policy.

GDP is a useful economic indicator but GDP per worker is better as it is a measure of productivity. As Paul Krugman, the Nobel Prize-winning economist observed: “Productivity isn’t everything, but, in the long run, it is almost everything. A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker.”

Productivity in the UK has been sluggish since the financial crisis, and the most recent data shows that it decreased by 0.2 per cent between January and March compared with the same quarter in the previous year. There are many competing explanations for the productivity crisis, including a lack of investment, inadequate skills and a lack of innovation.

My own research (published in the Cambridge Journal of Regions, Economy and Society) shows that the innovation problem in the UK is a diffusion problem – among geographies and sectors – rather than a generation problem. Simply, many UK businesses are reluctant to invest in the latest innovations, technologies and business practices – and that’s not very reassuring in the wake of the latest official numbers.

Then there’s Brexit. The ONS figures were attributed in part to Brexit uncertainty, but will the economy be rejuvenated following the eventual certainty of Brexit?

The verdict of the overwhelming majority of economists is clear: no, it will not. Brexit has achieved the “nigh-on-impossible” of uniting economists, a group that, according to the Irish playwright George Bernard Shaw, if they “were laid end to end, they’d never reach a conclusion”.

Economists do differ over the size of the negative economic impact of Brexit, which is not surprising as it is not easy to estimate the impact of a unique event.

It seems clear, though, that Brexit will hinder the economy through three mechanisms. First, depressing trade as it takes times to negotiate trade agreements.

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Second, by discouraging immigration which will hinder the labour market, depress tax revenues and (most importantly) hamper innovation as many of the UK’s most prominent scientists and innovators have come from abroad.

Third, reducing foreign direct investment, as many international firms will want to be inside and not outside the single European market.

Forecasting long-run growth is difficult as it must take account of shifts in economic policy. Boris Johnson has signalled changes in policy, some of which may be substantial and others which are superficial. The latter include “free ports”, an economic chimera that will just shift economic activity around the UK and give a real boost to only tax-evasion and money-laundering.

The substantial element to Johnson’s policy is masqueraded as “boosterism” but it is a Keynesian fiscal boost intended to counteract the negative shock of Brexit. But to be effective, an expansionary policy needs to be carefully and strategically implemented; it is not simply about shaking the “magic money tree”.

Economic strategy is now in short supply as expansionary policy is being made up by those who argued for nearly a decade that austerity was the route to prosperity. The lack of consistency and integrity is shameful and, as the turbulence in foreign exchange markets shows, does not signal a likely return to prosperity anytime soon.

Michael Kitson is an economics lecturer at Cambridge University

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