This EU Won't Work

Ladies and gentlemen, place your bets. Is Brexit a winner or a loser? What are the odds on the UK economy being a success after leaving the EU and what are the ‘tipsters’ saying? To guide your instinct we provide the following review of some of the leading economists’ guesses.

So what are economists forecasting for the future of the UK economy after Brexit? In short, almost anything you could imagine; there is no more consensus now than there was a year ago after the Referendum votes were counted. 

In this post we review some of the opinions that professional economists are promoting as forecasts. We guess that wiser economists, learning from last year’s forecasting failures, are keeping their heads down. However, there are enough who are willing to put their opinions on the line for us to confirm that uncertainty remains the norm. (We call these ‘opinions’ rather than forecasts because although they come from people whose professional knowledge and experience is second to none, the range of views that have been published indicate clearly that Economics is not in the forecasting business, and shouldn’t yet try to be.)

Our sources are news reports of statements made by reputable professional economists.

“As Britain leaves the European single market, trade volumes are expected to fall sharply. Few economists expect Britain to make up that loss in increased trade with other countries. That means that Britain’s share of global trade will only fall further.” (The Economist – TE) 

TE has been a firm and consistent opponent of Brexit and, with some reservations, applauds the EU. This may be because their main interest is in economics and that is the declared interest of the EU too. Unfortunately it is clear from EU writings and speeches that “a better and fairer life for all citizens” is at best a secondary goal, secondary to “a stronger boost towards economic union…” (quotes from the Five Presidents Report). When TE says “few economists” they mean few of the ones they read who agree with their view of Brexit.

An article from the Daily Telegraph (DT), a consistent supporter of Brexit and critic of the EU, takes an opposite position.

For some time after the Referendum “…emotions raged but the fundamental natures of most listed businesses – and shareholders’ reasons for owning them – hadn’t changed. This is exactly where we are today. … Once that reality had reasserted itself, investors quickly saw that the drop in sterling had gilded the opportunity further: not only were attractive businesses cheaper, but the income they produced (being in dollars) was suddenly more valuable.” 

Although TE was writing about trade and DT about investors, the two are intimately linked; if trade is falling then so are investment opportunities. These two views from economists contradict one another.

The BBC reported that David Owen, chief European financial economist for Jefferies, still thinks the UK could be in for a rough ride.

“For six months or so after the Brexit vote, the UK economy as a whole also held up surprisingly well, helped by the significant monetary easing announced by the Bank of England last August and the move down in the currency. … But recent weeks have seen growing signs of the wheels coming off the UK recovery, with real incomes squeezed by the decline seen in real wages.”

Some economists, including Martin Beck of Oxford Economics, thought that the shock to the economy of Brexit would not be great; there was no reason to believe that businesses and consumers would quickly reduce their spending. However, he now believes that growth in the UK economy will slow, partly as a result of uncertainty over the Brexit negotiations and their outcomes. 

More generally, research done by Oxford Economics suggests that the UK economy will suffer in the long run with a gradual cumulative effect leading to a shortfall in growth of 3% to 4% compared with its potential within the EU.

Again, Martin Beck says that departure from the EU Customs Union may have benefits as Britain builds trade links with China and India, among others. He notes that even before the Referendum exports to the EU had been falling, relative to other markets. 

The CBI expects that growth in the economy will “shift down a gear” as household spending slows. Its Director General, Carolyn Fairbairn, says that, “The less likely a Brexit deal starts to look, the harder it will be for firms to recruit and retain talent as well as push the button on big investment decisions.”

Professor Patrick Minford of Cardiff University says that having a devalued pound boosts demand for exports. Businesses invest more money because they can sell more easily abroad and more expensive foreign goods encourage consumers to buy British, giving an extra push for business investment. He too argues that if negotiations break down it may boost stock market sentiment, as the UK could move towards free trade agreements faster.

Douglas McWilliams, deputy chairman of the Centre for Economics and Business Research, said after the Brexit vote that he expected a boom but now he is sure that the economy will suffer because of uncertainty, not least over an expectation that immigration will fall.

The International Monetary Fund has revised up its UK growth forecast for the second time in three months after admitting that the performance of the economy since the Brexit vote last year had been stronger than expected. The IMF said it now envisaged the British economy expanding by 2% in 2017 – making it the second fastest-growing advanced economy after the US.

Oxford Economics raised its forecast and now expects growth of 1.6% for 2017. The Bank of England trimmed its economic growth forecasts for 2017 from 2% to 1.9%. The Office for Budget Responsibility now expects the economy to grow by 2%, up from its previous forecast of 1.4%. The British Chambers of Commerce forecasts that the UK economy will grow 1.4% in 2017. That is faster than its forecast made in December for 1.1% growth this year. 

Economists may be misled by over-reliance on computer models. Such models cannot take account of the unexpected. Nor can they model sentiment, unless the moods of investors and consumers are influenced in the same way as at earlier times. So for example, the uncertainties around Brexit and the minority Conservative government may well have negative impacts but how exactly do these factors compare with past experiences? The uncertainty about uncertainty is certainly one reason for the certainty that most of these forecasts will be wrong. Some may be spot on but with enough different forecasts to chose from that could be the outcome of a lottery.

Our conclusion is that although economists have masses of data available to help them to understand the economy and its potential direction they do not have consistent and reliable theories on which to base their forecasts. In effect their ‘forecasts’ are fingers in the winds of data and opinion and cannot be taken as more valuable than non-expert views.