Controversy still rages about the overall economic effect of Brexit, whether or not we leave with “a deal”, and whether this happens on March 29 or is subject to delay.
But there is likely to be a distinct pattern to how this effect pans out over time. Unless this pattern is understood, it could have a profound effect on the national mood.
The adverse effects of Brexit will be front-loaded and the benefits back-loaded. It is difficult to find even the most devoted of Brexiteers arguing that things will start to improve immediately after Brexit. So, this issue has something of the characteristic of an investment decision: immediate costs in order to secure long-term benefits.
The first phase, which we are already in, involves firms taking action to avoid what they perceive to be the ill effects of Brexit. There is already a flow of news items concerning businesses cutting back on their activities in the UK.
These are often accompanied by announcements of jobs lost. In some of these, Brexit will genuinely have contributed to the decision. In many, however, it will just be a convenient excuse.
Over the next several months, mismanaged and failing businesses will try to cover up shortcomings by blaming it on Brexit.
But this phase will also include some good news about how the job losses are comparatively minor and how most of the economy is carrying on pretty much unscathed. Indeed, there has recently been a fair bit of good news about the UK economy.
Once we have actually left the EU, we will enter phase two. News organisations will scour the ports, roads and supermarket shelves for evidence of disruption and shortages caused by Brexit.
If the pound weakens, this will tend to push up prices in the shops. But it is by no means obvious that it will weaken. After all, the markets have known about the UK’s impending departure for some time and even suspected that we might leave without a deal. This can hardly be construed as a shock.
Indeed, I have long argued that the most important risk that the markets face is not Brexit – deal or no deal – but rather Jeremy Corbyn. If this whole process results in a fall in support for Corbyn’s Labour Party – which, in view of recent political events it might well do – then the pound could even rise in the wake of Brexit.
In the months after Brexit we will feel the effects on prices of any change in our tariff regime – if there is one. Under WTO rules, we are obliged to impose the same tariffs on goods imported from different countries, unless we have a free-trade agreement (FTA) in place or we are in the process of negotiating one.
But we have a choice as to whether to impose the current EU external tariff rates on all goods or to set lower rates on particular ones, for example on those that we do not produce, such as oranges. We are due to hear shortly what the Government’s intentions are.
And it is still possible that the UK will approve something like Theresa May’s deal, or the UK and the EU will agree not to impose tariffs on each other’s exports, pending the conclusion of an FTA, in which case there won’t be tariff-induced price rises.
But even if we do end up imposing tariffs, some businesses will surely choose to put prices up by less than the amount of the tariffs, or not at all, as they seek to preserve market share.
Soon after Brexit, the policymakers will respond. According to the Governor, Mark Carney, the Bank of England is as likely to raise interest rates as to cut them. I think this is wrong. The Bank is much more likely to cut rates, perhaps immediately, in an effort to boost confidence.
More important will be the fiscal policy response. The Chancellor would need to do something to return the increased revenues raised from consumers through tariffs on imports from the EU – if they are imposed – perhaps in the form of across-the-board reductions in certain tariff rates or perhaps through a reduction in VAT.
An emergency budget is likely to include more general tax reductions and probably some increases in government spending. In other words, he is likely to ditch, or at least suspend, his ambitions to reduce the budget deficit in favour of giving short-term support to the economy.
In less than a year I expect the economy to move into recovery mode.
It will be recognised that although there have been some short-term disruptions, the sky hasn’t fallen in. And the uncertainty that has bedevilled economic activity will have dissipated. Investment that has been postponed will start to come on stream. The upshot is that 2020 may well be a year of strong growth for the UK even if growth of the world is slowing. We could readily be the fastest growing economy in the G7.
The final phase will be when the benefits of Brexit start to flow. These will derive principally from two sources. First comes our ability to run an independent trade policy, involving the securing of FTAs with a number of countries and/or the unilateral reduction of tariffs in selected areas. This will bring a series of price reductions, and improved opportunities for our exporters.
The second source will derive principally from our decisions to reform or even abolish various regulations imposed by the EU. This phase will not be immediate, and it is likely to be drawn-out. We will need a serious debate about our regulatory regime and a government with both the courage and the political mandate for radical reform.
For this phase to begin in earnest, we may well have to wait until after the next general election – whenever that may be.
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