Even for a Brexiteer such as I, these are difficult days. The short-term damage to the economy looks like it will be significant. Every piece of economic data, whether real figures on output or surveys on consumer and business sentiment, is picked over for clues about the effects of Brexit. Economies, of course, move much more slowly than that; leads and lags take months and years, not days and weeks, to work through. Quite different to the pace of the media – hence some confusion about what’s going on.
Whatever the merits of Unilver’s attempted 10 per cent price hike on Marmite and hundreds of other product lines – and the effort by Tesco, heroes for once, to resist – it is a taste of much worse things to come. For a nation that imports so much – too much, indeed – a rise in the cost of things we take in from abroad is inevitable. Sometimes retailers can try to offset it, as here. And for many goods it should take some more months yet to feel the full effects (Unilever’s price rise looks suspiciously quick for a product so locally sourced as Marmite), but the squeeze will come – and plenty more pain besides.
For the next year or two we will be engaged in a phoney war. Orders cancelled, investment plans shelved, retailers passing on price rises, pay agreements, all take time to decide and to work their way through and affect other each other. It’s dynamic and fascinating to watch, albeit sometimes morbidly so, but it’s a slo-mo thing.
However it is possible to peer into the future a little further. We can see how the British economy, as it adjusts to a new short- to medium-term reality, will be a tougher place to find a job and maintain living standards, with more crime, social dislocation, austerity cuts and quite a jolt to property values.
Yes, it will most likely be ugly. Will the Conservatives and Theresa May, currently enjoying healthy poll ratings and a honeymoon, be blamed for crashing the economy in two years’ time? What sort of price could they pay?
Here’s how it might happen:
The pound plummets
Sterling could slide even lower than it has. Much is made of the current 30-year-low showings against the dollar, and that is shorthand enough for sterling weakness. Try as you might (and I have), you can scan across a range of better indicators that show that sterling is very weak by any standard – against a trade-weighted index that includes the euro, yen, Swedish and Danish kroners, the Australian, Canadian and New Zealand dollars, Yuan and other major trading partner currencies; by looking at real exchange rates, allowing for different inflation rates across nations; every which way, the picture is uniformly one of sterling weakness.
It’s very low but it could go lower. There is no law that says it can’t, and it’s a mug’s game for governments to try and manipulate their currencies (remember Black Wednesday in 1992?). You can’t buck the market. Let the pound go where it will. And know it will hurt not just holidaymakers abroad.
Just as well, though, because it will help exporters and protect home markets against imports, with profits and job opportunities correspondingly brighter in many sectors. However, there is no doubt that it will lead, in a couple of years’ time, to a step up in inflation, maybe a protracted rise.
The Bank of England has a phrase for this sort of imported inflation, when they see the impact it has on rising prices: they like to “see through” the effects. This is especially the case if wage growth remains subdued, so it can be called a one-off.
Governor Mark Carney has said as much about this latest prospective round of accelerating inflation, and his predecessor, Mervyn King, certainly did when inflation was double the official target for lengthy periods. They do not want to smash the wider economy, destroy productive capacity and, in due course, make it harder for the UK to grow without inflation. They’re not vandals.
People demand higher wages…
Even so, a really harsh depreciation that shows no sign at all of reversing will be harder to “see through” and the Bank may find itself constrained at any rate. Thus, it may not be able to relax monetary policy any more than it already has (and it may well have hit diminishing returns from that policy).
Wage growth is near zero now, but inflation expectations are growing (suggesting the public is more economically literate than many give them credit for). That could point to a period of higher wage demands, unlike the last recession when they were still subdued. People may simply feel they cannot themselves “see through” the squeeze on their incomes, which has dragged on for about a decade now.
... But profits fall
Should that happen then profits will be depressed and jobs growth will slow – or even reverse. That would mean even a reduction of the flow of competing migrant labour would fail to lift wages for most, apart from some well noted local labour markets.
Interest rates rise
If the Bank finds itself with no alternative but to raise rates even in a sluggish economy because imported inflation has sparked a mini-spiral of inflation, then the consequences of that will be grim indeed – not least for the ease and cost of government borrowing. A sliding pound plus rising commodity prices plus a wages boom would make for a nasty cocktail of inflation.
The Greece effect begins
That matters because the Treasury is putting so much faith in infrastructure investment as the best way to boost the economy short term, and to raise productivity, and thus growth, longer term. There an awful lot in that. The problem is that the current abnormal world of low rates may not last, and the ability of the Government to borrow cheaply may not last either. After all, we do have a very large public debt relative to the size of our economy already (whoever is to blame for it).
At the moment the Bank of England buys much of the debt the Government issues. That may not last the course, and what happens if the Bank starts to flog off the huge pile of gilts they have acquired over this long run of monetary easing? No one expects them to just dump them on the market, but the effect will be generally contractionary. The upshot? More public spending cuts and tax rises, a milder version of what Greece has gone though.
The national mood plummets as house prices crash
The general mood of depression, the rising trend of interest and mortgage rates, more job insecurity and a squeeze on real wages (even though the paper rise loosk respectable) will have a major impact on the housing scene, which has been buoyed by low interest rates, foreign money and over-optimistic borrowers for a long time. And once it turns, as we have seen in the past, it tends to crash quite spectacularly.
“Negative equity” is a phrase we’ve not heard for a little while, and it could replace bragging about property wealth at the dinner parties of the rich, or formerly rich. People will be poorer, more desperate, less able to get help from the state. There’ll be more social unrest, strikes and the odd riot. Boris, Andrea, Nigel and Michael didn’t tell you that either.
The economy adjusts
You can swallow all of this and still be a Brexiteer if you take the view, as I do, that these adjustments are necessary and inevitable for the UK to rejoin the world economy with a competitive offering, rather than relying on a large but essentially closed-off, stagnant and protectionist single market in the EU.
Sooner or later we will have to have the sort of industrial “cold shower” we endured, in fact, when we joined the EU in 1973, when our protected firms and industries came face to face with Europe’s best. It took a long time for them to adjust and for growth to return but when it did it was because, in those days, the EU was good for the economy; it is not so now.
Politicians pay the price
Politically, the Conservatives could still hang on even if they are judged to have crashed the economy if the alternative – Labour – is perceived as being even worse. This is precisely what happened across long stretches of history, with the general elections of 1983 and 1992 notable for being held against a background of mass unemployment and, in the latter case, a property crash.
By the same token, in 1997 the Tories had fixed the economy but still lost because Tony Blair and new Labour were regarded as a safe and competent by the voters. Protest vote parties, such as Ukip and the Lib Dems, will only prosper if they persuade people that they will not, for example, “let Labour in”. In general elections they do tend to get pushed out of the way.
Brexit, then, has hardly made its presence felt yet – but when it does it will be unpredictable in its reach and probably chaotic in its effect on society and politics. The positive effects of Brexit will arrive, but they will take far longer to deliver – decades, rather than months or years.
That, I freely agree, was hardly a message the Leave campaign gave to the voters, but it is the harsh truth. Brexit is for pessimists.
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