Brexit

Amid the legion of uncertainties surrounding Brexit is there much that can be said with some degree of confidence? Economic forecasts are hardly renowned for their accuracy, but they provide a starting point for thinking about the potential economic effects of Brexit.

Among think tanks, private sector groups and international organisations there’s a broad consensus that a no-deal exit would hit growth hard this year. But most forecasters think that even with a no deal the UK would probably skirt a serious recession, with its growth rate dropping from a lacklustre 1.4% in 2018 to around just 0.3% this year.

At this point the consensus breaks down. Some forecasters think after the initial shock activity would bounce back in 2020. Others believe the damage would be longer lasting and would keep growth around the 0.3% mark in 2020 too. The ratings agency S&P is the most pessimistic of the forecasters we’ve seen. It thinks a no-deal Brexit would generate a “moderate recession lasting four or five quarters”.

If the UK avoids a no-deal Brexit most forecasters think growth would hold up this year and next. The forecasts we’ve looked at imply that exiting with a deal, remaining in the EU or protracted delay under the current rules would leave the UK growing at 1.5% in 2019 and 2020, marginally above last year’s 1.4%.

The range of conceivable outcomes for GDP growth this year, from close to zero to almost 2.0%, mirrors the range of possible Brexit outcomes. Helpfully, economists publish forecasts showing what they consider most likely to happen, as opposed what they consider could happen.

On this front I was struck by the divergence between last week’s Brexit news and economists’ fairly sanguine central view on growth. Last week the publication Consensus Economics reported that, on average, the 31 economists they poll forecast that the UK to grow by 1.5% this year and 1.6% next. These are not strong numbers. But against a backdrop of Brexit and an expected slowdown in the US and euro area they’re not bad either.

The fact that average forecasts for growth are far in excess of the ‘no-deal’ estimates show that economists see a deal, a soft Brexit or no Brexit as more likely outcomes.

Some commentators have suggested that UK equities, which are currently deeply unloved by investors who fear a chaotic Brexit, are under-priced. Believing that something is unlikely to happen is different from investing on the basis it won’t – the latter requires an altogether higher degree of conviction. Over coming weeks the path of domestically facing UK equities, the likes of retail, leisure, house-builders and the banks, will give clues as to which way investors think Brexit is going.

All of this considers the short-term effects. But what would be the long-term impact of Britain leaving the EU?

The UK's National Institute of Economic and Social Research (NIESR) and HM Treasury think that long-term growth would run lower outside the EU. In NIESR’s forecasts lower migration slows workforce and GDP growth. Greater friction in trade, reduced skilled migration and lower foreign direct investment also dampen productivity.

My sense is that whatever happens on Brexit the rapid growth of the non-UK born workforce in the last 20 years, well in excess of the UK born workforce, is unlikely to be sustained (partly because the effects of EU expansion into Central Europe were one-off, albeit a prolonged one, but also because of domestic UK politics).

Forecasting anything in the long term is a highly speculative business. But were Brexit to mark a move to a significantly less open economy, competitiveness and growth would surely suffer. As ever, it all depends – on the deal, the response of the private sector, domestic policy and the global backdrop.

Since the 1980s the UK has been seen as offering a stable, open, pro-business environment. The question is whether Brexit changes that, and, in doing so, pushes the UK onto a permanently lower growth path.

Whatever happens on Brexit much will remain the same. Inside or outside the EU the challenges for the UK economy – above all how we raise productivity growth – are wearily familiar.