Larry Elliott
A slowdown looks inevitable, but this is
not a surprise: the economy wasn’t
working for many people before the EU
A lmost four weeks have passed since
Britain voted to leave the EU, and those
who wanted to remain in it are having
trouble accepting the result. They feel
bereft. They feel that they were defeated
by underhand means. They feel that those
who voted for Brexit were uneducated
and didn’t really understand what they
were doing.
There is a nasty undercurrent of disdain,
bordering on contempt, to all this angst.
Many of those on the losing side of the
referendum debate appear to actively
want the economy to slide into recession
in order to teach the 52% a lesson.
Let’s be clear. The economy is fragile. It
was slowing down even before the
referendum date was fixed and it is ill-
prepared for the shock of Brexit. The UK
has a budget deficit of 4% of GDP, a
balance of payments deficit of 7% of GDP
and the worst recent productivity record
of any G7 country bar Italy. The idea that
George Osborne “fixed the roof while the
sun was shining” is fatuous.
What’s more, it is easy to sketch out the
reasons why things are going to be
difficult. Traditionally, investment is the
swing factor in any economic cycle. When
businesses are upbeat about the future,
they spend more on new kit, boosting
national output. When they are cautious,
as they are certain to be now, they
mothball spending plans and GDP
Consumer spending will also be hit by the
squeeze on spending power caused by
the higher inflation that will result from
the impact of the falling pound on the cost
of imports. The flipside is that exports
become cheaper, which will help boost
output, albeit not by much, unless global
demand recovers from its current
depressed level.
A slowdown, therefore, seems inevitable.
The extent and duration of that slowdown
will depend on the actions taken by the
Bank of England and the Treasury, and
how long it takes the government to
sketch out what a Brexit Britain is going
to look like.
None of this is a surprise. The notion that
the economy would struggle after a leave
vote was strongly argued during the
referendum campaign, but did not carry
the day. Hence the view that those who
voted for Brexit didn’t understand what
was at stake.
Yet the evidence suggests that many of
those who voted to leave knew that there
would be a short-term hit to the economy,
but decided that they were willing to take
the risk. They weighed up the pros and
cons – as did US investment banks, the
CBI and universities – but came up with a
different answer.
A speech given last week by Andy
Haldane, the chief economist at the Bank,
helps explain why so many people were
unmoved by George Osborne’s argument
that the UK would be voting for a DIY
recession if the country opted for Brexit.
On a visit to Nottingham, Haldane said he
was struck by the fact that for many
people, the recession that followed the
financial crisis of 2008 had never ended.
When he talked about economic recovery,
he was stopped in his tracks by a “forest
of furrowed brows”. The message was
simple: there had been no recovery. As
Haldane went on to explain, this was not
a case of false consciousness. The
economic facts are plain: the economy is
simply not delivering for millions of
Earnings are 7% above where they were
when the recession ended in 2009, but
still 5% below the peak once rising prices
are taken into account. This is the longest
period of flat or falling real wages since
the mid 19th century.
UK national wealth, measured by the
value of assets such as property and
pensions, has increased by an impressive
sounding £3tn since 2009, but the gains
have been skewed towards those who
owned their own homes or had sizeable
pension pots.
Only in two UK regions of the UK, London
and the south-east, is GDP per head
higher than it was before the recession.
Everywhere else, it is lower – strikingly so
in some parts of the country.
The argument deployed by the remain
side, that the only real risk to Britain’s
economic renaissance was a vote to leave
the EU, worked in the more affluent parts
of Britain, where the recovery was
tangible, but fell on deaf ears elsewhere.
During the campaign, Osborne put out
figures showing that households in the UK
would be £4,300 a year worse off on
average by 2030 in the event of Brexit,
because the economy would be six
percentage points smaller. This had zero
impact. In part, that might be because
voters were rightly dubious about the
Treasury’s ability to make such long-term
economic forecasts. But it seems that
even those who did think that the
economy might be a bit smaller by 2030
took the view that the additional six
percentage points of GDP would accrue to
rich people living inside the M25 and not
to them. All the evidence suggests that
this was a perfectly logical assumption.
In essence, the referendum divided Britain
between those who were doing well out of
the status quo and those who weren’t.
The latter group wanted change and
appear to be willing to risk a recession to
get it.
And change there has certainly been.
Osborne has been fired, his ludicrous idea
of a post-Brexit “punishment” budget has
been scrapped, and the idea of balancing
the budget by the end of the parliament
rightly abandoned. The Treasury has
been told to put growth before deficit
reduction, a change of tack that is long
overdue, and will have to work with a
business department that has the crafting
of an industrial strategy as part of its
remit. A stimulus package will be
announced by the Bank next month.
Brexit has also forced the rest of the EU
to have a rethink, with a debate under
way between those who think that the
response should be a drive for closer
integration and a more powerful group,
which believes that the dream of political
union is dead in the water. As in the UK,
budgetary rules will be loosened, and not
before time.
None of this should disguise the enormity
of the challenges ahead. But Britain’s
economy is dysfunctional and needs to be
fixed. The same applies to the eurozone,
only more so. Brexit provides an
opportunity to try alternatives to failed
policies. There is no guarantee that this
opportunity will be seized. However,
when the remainers talk of themselves as
a persecuted minority and embrace the
idea of recession with such relish, they
should be aware of how they might sound
to the people that Haldane spoke to in
Nottingham: pampered, vindictive and
unable to accept that they lost.