Hologram

Depending on how Brexit goes 2019 could see UK growth accelerate or almost grind to a halt. So, say two forecasting groups which have modelled the economic effects of the UK’s exit from the EU.

The UK’s National Institute of Economic and Social Research (NIESR) and the Organisation of Economic Cooperation and Development (OECD) have come to broadly similar conclusions. They estimate that with a deal and a transition UK GDP growth would average around 1.6% in 2019 and 2020. This would represent a modest acceleration from growth of roughly 1.3% this year. The expectation is that with Brexit risk reduced, activity, especially business investment, would bounce back.

Without a deal the NIESR and the OECD estimate UK growth would slow sharply, with the economy expanding by an average of about 0.4% over 2019 and 2020. This points to near stagnation in activity - though not a severe or protracted recession.

All forecasts need to be taken with a large pinch of salt. It is difficult to estimate how fast the economy grew in the previous quarter - let alone forecast what it will look like in one or two years’ time. Forecasts are fallible, and the longer term the forecast the more fallible it is.

Yet they are a worthwhile starting point for thinking about the future. Forecasts provide a structured way of assessing how a multitude of factors could combine to influence growth. The output – a GDP forecast – is a condensed summary of a complex view of the world.

There is no precedent for a no-deal exit from the EU. But past events - from the EU referendum in 2016 to the disruption of the three day week in 1974 and the euro debt crisis – offer clues.

A no deal exit might be expected to affect growth through three main channels. Any weakening in business and consumer confidence would weigh on investment and household spending. A fall in the pound would fuel inflation and squeeze consumer incomes. Regulatory disruption and uncertainty would tend to slow activity, much as the 2000 fuel protect did.

There is less concern today than in 2016 that a no deal exit might trigger a renewed credit crunch. Financial markets seem to think that the banks are well positioned to cope with such an eventuality. Last week the governor of the Bank of England, Mark Carney, noted that even when the risks of a no deal exit rise there is no rise in the cost of borrowing for banks.

The profile of UK growth in the coming months could become choppier as firms and consumers seek to insulate themselves against the risk of disruption by building stockpiles.

In its latest edition, The Economist announced that it is stockpiling around 30 tonnes of the paper for its UK print edition. Last week Majestic Wine said it would increase UK stock levels by up to 1.5 million bottles of wine. UK food retailers are also reported to have considered building stocks, though limited storage capacity, especially for fresh food, make this difficult.

Increased stockpiling adds to current activity at the expense of reducing future growth (In GDP terms it represents growth brought forward). The effects on quarterly GDP growth can be significant, making it harder to assess the underlying momentum of growth.

The official independent forecaster, the Office for Budget Responsibility (OBR), argues that if supply bottlenecks were to persist after Brexit output could decline significantly. The OBR drew comparisons with the introduction of an emergency three day working week in early 1974. It was made necessary by a miners’ strike which disrupted energy supplies and made full-time working impossible. Short time working contributed to a near 3% fall in quarterly output.

So how might the authorities respond to a no-deal exit? The Chancellor, Philip Hammond, has hinted at the need for a special Budget in such circumstances. It might seek to counter any immediate knock to growth by boosting public spending and cutting taxes.

Mr Carney has suggested that the Bank of England would be inclined to see a no-deal Brexit as a supply shock which would exacerbate bottlenecks and increase inflation risks. As such, the appropriate response, Mr Carney said last week, would be to raise interest rates.

Whether, faced with a sharp slowdown in growth, the Bank would follow through on this remains to be seen. Raising rates in the wake of a no deal exit would be politically controversial and economically contestable. Financial markets take the view that if the UK leaves without a deal the chances are that interest rates will be cut, not raised.

Finally, it’s worth noting that Brexit will be a major, but not the only factor, influencing UK growth in the next couple of years. The external environment, financial conditions and the unfolding path of the domestic economic cycle matter too.

PS: There has been a remarkable turnaround in the number of manufacturing jobs in the US. The number of American manufacturing jobs fell by 60% from the turn of the century to 2010. Since then, it has risen by 11%. While President Trump made the on shoring of manufacturing jobs part of his 2016 election campaign pledge, a modest revival in manufacturing may have already been well underway.