Wages across the UK are 2.8pc up on a year ago, ahead of inflation. Unemployment is at a 42-year low. The PMI manufacturing index registered 54.0 in July, with readings above 50 indicating growth – its 24th successive month of expansion since the June 2016 referendum on EU membership.
Back then, a jobs bloodbath was widely predicted if the UK voted for Brexit. HM Treasury pointed to an “immediate and profound economic shock” after any such vote.
Despite that, employment has ballooned over the last two years, mainly in full-time jobs – directly contradicting the Treasury’s irresponsibly political forecast. And now we’ve just learnt UK growth rose to a reasonably healthy 0.4pc during the second quarter, up from 0.2pc at the start of 2018, when activity was hit by snowstorms.
We often read that, since the Brexit vote, the British economy has lagged other advanced nations, languishing “at the bottom of the G7 growth league”. That’s not actually true. UK GDP expanded 1.8pc in 2016, ahead of the US, France and Canada, among others. Last year, growth was 1.7pc – still better than Japan and Italy, both in the G7 the last time I checked.
With France, Germany and the broader eurozone slowing this year, UK growth is set to fall to 1.5pc in 2018, according to the Bank of England, again ahead of Italy and Japan. And there’s an important proviso. Growth in both these nations remains propped up by ultra-loose monetary policy – in the form of ongoing quantitative easing.
The European Central Bank (which covers Italy, of course) and the Bank of Tokyo continue to pump out the equivalent of tens of billions of dollars each month. Yet, despite that, it looks like growth in Italy and Japan will struggle to reach 1pc in 2018.
The Bank of England stopped QE years ago. And now, finally, UK interest rates are on an upward trend. It was the right decision to raise rates to 0.75pc earlier this month. As regular readers will know, in my view such a move was long overdue. While ultra-low rates were justified in the immediate aftermath of the 2008 financial crisis, monetary policy has, across the western world, stayed too loose for far too long.
As long as real interest rates are negative – with nominal rates less than inflation, as they still are not just across the eurozone but also the US and UK – that penalises not only ordinary savers but also institutional investors.
Low bond yields, in turn, mean that to meet ongoing obligations, major investors are forced to channel money into far riskier financial assets, stoking another boom/bust cycle.
Negative real rates also squeeze banks’ profit margins, making them even less willing to lend. Far from encouraging growth, that slows economic activity. For years now, frothy financial markets and a lack of bank credit have combined to stymie non-financial investment in machinery, construction and other “ordinary” sectors. And, in general, the ongoing “weirdness” of monetary policy has also caused many firms to sit on the sidelines, hoarding cash, amid concerns that central bankers have taken us into uncharted territory, with over-stoked asset prices primed for collapse.
It is a good thing that, despite such financial fragility, the US Federal Reserve has raised rates seven times since late 2015. The world’s largest economy is on a clear path back towards some kind of monetary normality – and it’s encouraging the UK has followed.
What’s now needed is for the US, the eurozone, Japan and Britain to agree on a co-ordinated rate rise. That would send a strong signal that, a decade on, the 2008 disaster is truly behind us – but without the individual central banks worrying about their respective currencies rising, so losing competitiveness, as a result of increasing rates alone.
I’m by no means complacent about the UK economy. Yes, the latest growth number is reasonable – and makes a nonsense of all that pre-referendum doom-mongering. But the signs are the economy could cool again over the next few months.
The second quarter data shows the UK’s service sector grew 0.5pc, with construction up an encouraging 0.9pc. But overall growth slowed from 0.3pc in May to just 0.1pc in June – with our pivotal services sector, accounting for around four-fifths of the economy, looking weaker. And unofficial survey data shows the PMI “composite” index, covering the entire economy, down from 55.0 in June to 53.8 last month.
As a Brexiteer, I believe Britain’s long-term growth trajectory is higher outside the EU – allowing us to trade more competitively with the rest of the world. I’ve always accepted, though, that Brexit-related uncertainty would impact short-term investment. While that impact has so far been limited, I fear it could soon rise as a result not of Brexit itself, but the quite astonishing extent to which the Government is bungling these negotiations.
Back in January 2017, Theresa May’s Lancaster House speech displayed admirable clarity of thought. The UK would be leaving the single market and customs union. And, the Prime Minister made clear, if the EU was too intransigent to offer a decent free-trade agreement, we’d trade under World Trade Organisation rules instead – an entirely reasonable outcome.
Business leaders, in general, welcomed that clarity, even those who voted Remain. Now, May is instead pursuing “half-in, half-out” fantasies”. Ministers are issuing WTO scare stories, rather than providing entirely justifiable assurances such arrangements are manageable.
Government policy now seems to be to make as big a mess of Brexit as possible – a strategy that, in stark contrast to the Lancaster House approach, is sowing maximum uncertainty. No one should be surprised at the resulting economic fallout.
To read Liam Halligan’s piece in full, click here.