Had sterling not depreciated and the economy continued to grow at its previous rate, real household disposable income might have been 2 per cent higher than nowby Garry Young / November 8, 2017 / Leave a comment
Much has been made in the media of new estimates, published in the National Institute Economic Review, suggesting that leaving the European Union without a deal and moving to World Trade Organisation rules—the so called “hard Brexit” scenario—would add £930 to annual household bills in the future, due to tariffs being imposed on EU imports. The NIESR’s new UK forecast, published in the same review, shows that before any kind of Brexit—soft or hard—has occurred the uncertain process of preparing for leaving is having an adverse effect on our economy. And the impact is being felt by ordinary households to the tune of £600 a year. Having been one of the fastest growing advanced economies ahead of the referendum last year, the UK economy is now beginning to slow as others pick up the pace. It is estimated to have grown by 1.5 per cent in the year to the third quarter of 2017. This represents a loss of momentum from annual rates of GDP growth of 2 to 3 per cent achieved in the years leading up to the referendum. It is almost certain that the slowdown has been caused by the uncertainty surrounding Brexit. For businesses that export a significant proportion of their output to the EU, the rate of return on investment is likely to hinge on what type of access will be available beyond 29th March 2019. Delaying investment decisions until more is known about the UK’s future relationship with the EU is therefore the most appropriate response. As such, the lack of clarity about future trading arrangements is likely to be having an adverse effect on current levels of capital investment and other productivity-enhancing activities. Some evidence on the extent to which Brexit is an important source of uncertainty for British business is available from a Bank of England panel of senior executives. Panel members from a diverse range of non-financial businesses have been surveyed on a monthly basis since the referendum and provided their assessment of current business conditions. In August 2017, 39 per cent of respondents reported that Brexit was one of the top sources of uncertainty facing their business. Only 13 per cent of respondents said that Brexit was not an important source of uncertainty to their business, down from 23 per cent in August 2016. The recently published EEF/Santander Annual Investment Monitor covering the manufacturing sector also found evidence of Brexit-related uncertainty affecting investment intentions: a third of respondents were only investing to satisfy current plans and waiting for clarity on any deal before investing further, while thirteen per cent were holding off investment altogether until there was further clarity on a Brexit deal. “In August 2017, 39 per cent of respondents reported that Brexit was one of the top sources of uncertainty facing their business” Real incomes are also being affected by the significant weakening of the pound since the referendum and the effect this has had on the prices of imported goods and services. The pound has fallen by 17.5 per cent since its mid-November 2015 peak. Much of that decline is likely to reflect an assessment by the financial markets of how much producers of UK goods and services will be handicapped by Brexit and their need for a lower exchange rate if they are to compete. In line with this assessment, the value of sterling has tended to move in a consistent manner on news about the progress of Brexit negotiations and related policy announcements and speeches. It is impossible to know for sure what would have happened if Britain had not voted to leave the EU, but it is possible to estimate it. Had sterling not depreciated and the economy continued to grow at its previous rate, as would have been likely with an improving global backdrop, real household disposable income might have been more than 2 per cent higher than now, worth over £600 per annum to the average household. Looking ahead, it is very difficult to be confident about how the economy will fare over the next few years. Our central forecast is for the economy to grow at a rate of about 1.5 per cent a year. That forecast is based on the assumption of a relatively soft Brexit. In line with the prime minister’s Florence speech, we have assumed that there will be an “implementation period” of around two years after March 2019 where the UK essentially remains a member of the EU single market. We have assumed that beyond 2021 the UK will trade with the EU on a tariff-free basis by way of a negotiated free trade agreement. We have chosen to base our forecast on a soft Brexit because that seems closest to meeting the objectives of both sides in the negotiations and most likely to be acceptable to the EU and UK. But we do not have any great confidence that this will be the path to Brexit that will be followed. A disorderly cliff-edge Brexit where the UK leaves with no deal in place remains a possibility.