As the weeks roll by, the evidence is piling up that the UK economy is doing really rather well. Last week’s published economic statistics included a rise of 102,000 in employment in three months, record VAT receipts and growth of GDP in Q4 of 0.5pc, slightly faster than in the previous quarter and above expectations.
Last week Lord O’Neill, a former Treasury minister and prominent Remainer, admitted that the economy has done a lot better than expected. Nevertheless, he suggested that it had been bolstered by the dynamic performance of the North West, doubtless helped by the “Northern Powerhouse” project, driven by George Osborne, the former chancellor, aided and abetted by none other than one Lord O’Neill – and, perhaps more importantly, by the strength of the world economy. The UK would be doing even better than it is, he said, if we had not voted to leave the EU.
This has become the Remainers’ lament. Unsurprisingly so, because it has the merit of being unfalsifiable. We do not know what would have happened without the Brexit vote. The idea has some superficial support from the fact that the UK has slipped down the international growth league. Whereas we used to be at the top of the G7, recently we have surpassed only Italy and Japan. Some people have suggested that this change in ranking gives at least a crude measure of the size of the Brexit effect.
But the key word here is “crude”. The UK’s relative position before the vote was unsustainable, since it relied upon rapid growth of domestic demand, led by consumer spending, in advance of what was occurring in our major markets overseas. Hence the large and growing current account deficit. Moreover, when you look at the components of GDP, it is difficult to find convincing evidence of a pure Brexit effect. Investment spending was supposedly going to collapse. It didn’t. Indeed, in 2017 the growth of investment was faster than it had been in 2016.
True, the growth of consumers’ expenditure fell back from 3pc in 2016 to 1.5pc last year. But there is no mystery about why this happened. Real incomes were squeezed by the rise of inflation which derived from the fall of the pound. Admittedly, Brexit is widely credited as the trigger for this, but the pound had been overvalued for years, as manifested in a yawning current account deficit. We desperately needed a weaker pound in order to rebalance the UK economy. And the rebalancing has begun, with net exports now boosting GDP.
As this effect builds up and the squeeze on consumers abates, while the cyclical burst currently enjoyed in the eurozone subsides, there is every chance that the UK will rise in the league tables again – and this time on a more sustainable basis.
To read Roger Bootle’s piece for the Daily Telegraph in full, click here.