Conveniently for Consensus economists, the mandatory end-of-year reviews of 2016 and 2017 never included the forecasts they made in August 2016 at the height of their panic over Brexit. The 2016 forecasts they reviewed were all made at the end of 2015 when they did not expect Brexit and the 2017 forecasts they reviewed at the end of last year were all made at the end of 2016 when their panic had largely subsided and been replaced by sullen expectation of slowdown in some vaguely-specified future.
It is instructive to evaluate how the economy has turned out since the referendum since it is a good test of the Consensus negativism towards Brexit, led sadly by HM Treasury in its two Brexit Reports (short- and long-term). This consisted of two strands of thinking: Brexit would cause damaging uncertainty in the short term which would cause a collapse in demand, with a likely recession, and would also inflict long-term damage on the potential growth in the economy due to a contraction of trade with the rest of the EU.
The broad picture turned out quite differently on both counts. First demand did not collapse but continued to grow rather normally; during 2017 the consequences one would expect from a large devaluation showed themselves, with consumption slowing and net exports rising on the back of enhanced profits in the traded sector – the so-called ‘expenditure-switching’ effect of a devaluation. While a number of economists pounced on the slowdown of consumption as evidence of the forecast ‘demand slowdown’, this was plainly a misinterpretation of that usual expenditure-switching effect, now more obvious in the data as CBI and PMI (Purchasing Managers) surveys reveal the extent of the new upswing in manufacturing and other traded sales.
The economy is performing robustly in the face of a Brexit process which is still incomplete. The sooner the negotiations with the EU can be successfully concluded the better in terms of general confidence factors. As I have argued elsewhere, the UK would do well under ‘No Deal’, indeed it would in purely economic terms do better than with a Canada-plus trade deal, in that there would be a quicker movement to free trade and a big gain in our net financial payments to the EU. However what is important is that a united government proceeds to deliver its current clear policy to get agreement with the EU and non-EU trade partners on free trade, with the UK resuming control of its domestic regulations and its borders. That will pave the way for a decade of faster growth.
To read Patrick Minford’s piece for BrexitCentral in full, click here.