It is almost impossible to discuss the outlook for the UK economy without discussing the contentious issue of Brexit. Well let’s stick to the facts. In the 18 months following the Brexit referendum, the forecasts from the Treasury, the Bank of England, the IMF and OECD were wrong. Remember, this was an assessment of what would happen in the event of a Brexit vote and was mostly not an assessment of what would happen when Brexit actually takes place. Predictions of a recession, higher unemployment, a slump in productivity and a host of other calamities did not happen.
Nobel Prize-winning economist Professor Paul Krugman described the analysis from the Project Fear propagandists as “intellectual slumming”. Professor Patrick Minford of Economists for Free Trade (who is in my humble opinion the leading economist and best economic forecaster in this country) has demonstrated how the supposed “independent” economic modelling from the Treasury is just a case of “garbage in – garbage out”. They got the answers that their political bosses wanted.
The Treasury and other forecasters assumed that upon Brexit we would adopt the EU’s high tariff levels and retain the EU’s expensive reset of regulations. The whole point of Brexit is to escape the shackles of the EU. It is about taking back control of our laws, regulations, our borders and to have the ability to set our own trade deals.
The best trade policy is unilateral free trade that allows us to set our own tariffs as we like. About half of this year’s growth in the global economy comes from Emerging Asia. Only 12% of our economy is trade with the EU and only 8% of firms sell directly to the EU’s Single Market, but 100% of the economy is subject to EU regulation. More than half of UK trade is already on WTO terms and it is worth noting that trade in data and other services, where we have an £80 billion surplus, is greater than trade in widgets. In that sense the world is our oyster. Beijing, not Brussels, is where it’s at. 90% of global trade growth is expected to come outside of the EU. This is even acknowledged by the European Commission itself.
As far as the City is concerned, no bank has moved lock, stock and barrel to Paris and Frankfurt. The fact is that London is already the world’s financial centre. New York, Singapore and Hong Kong are the City’s proper competitors.
Rather than sinking into recession, GDP data increased 0.4% in the last quarter of the year. Employment is at a record high, productivity is increasing and UK manufacturing output extended its record run in December, rising for eight consecutive months and capping the best year since 2014.
The UK trade deficit narrowed in 2017, as exports increased 11% and net trade made its first contribution to economic growth in six years. The UK PMI services index increased to 54.5 in February from 53.0. It’s not just manufacturing that is recovering. For sure, the depreciation in sterling has helped, but this is what an exchange rate is designed to do and act as a “shock absorber”. There are many countries in the Eurozone that would love to have the ability to enjoy this exchange rate effect – such as Italy, Portugal and Spain – but which are locked in the straitjacket of a “one-size-fits-all exchange rate and interest rate policy”.
None of this was forecast by the OBR in November. Instead, they lowered their future productivity estimates significantly, thereby driving their GDP forecasts lower and raising forecasts of the PSBR. At the time, Economists for Free Trade published their alternative Budget ‘Redbook’, A Budget for Brexit, and showed that the OBR (and consequently the Chancellor’s) forecast was likely to be wrong. Events have proved them to be right and this weekend EFT published an update, A Budget for Brexit Update, explaining this and setting out the case that Brexit – as envisaged by the Government – will deliver a large Brexit dividend to the nation’s finances.
Of course, the Project Fear propagandists do not have the good grace to admit that they were wrong and now try to explain the better position of the economy as being the result of a recovery in the global economy (as if that was ever a bad thing). Now even the Bank of England and others have been compelled to face facts and upgrade their economic forecasts for the UK. For sure, Brexit is not a magic cure-all for the long-term problems such as low investment. But talking down the economy does little to encourage investment either.
Rather, Brexit should be seen as a positive opportunity to promote the longer-term prosperity of the UK economy rather than being a negative uncertainty. There is an opportunity for the otherwise gloomy Chancellor of the Exchequer to highlight a “Brexit dividend” of an extra £25 billion per year in spending when we exit the EU as EFT’s recent report makes abundantly clear. A “Brexit bonanza” of tax cuts, extra spending of £14 billion per year on public services means we can escape “fiscal austerity”. The worst thing that can happen is that the Government fails to deliver on Brexit and the UK ends up in a scenario of remaining under EU laws and regulations, having to cough up £10 billion a year without any say over how it’s spent and remains stuck in an endless “transition” period where we are unable to negotiate our own trade deals.