Johnson’s deal averts an immediate crisis but will corrode the economy over the longer termby Paul Wallace / October 18, 2019 / Leave a comment
Reaching a deal with the European Union is one thing; getting it through the Westminster parliament is another, as Theresa May found to her cost. Boris Johnson has defied the odds (and the pundits) by forging an agreement with the EU, through concessions over Northern Ireland that his predecessor was unwilling to contemplate. But the prime minister has yet to put his “great deal” to the House of Commons. When MPs meet on Saturday (the first such sitting since the Falklands War in 1982) they will have to consider above all what its overall impact on the economy will be.
Johnson’s deal has one big thing in its favour: it prevents the immediate danger of Britain crashing out of the EU. Despite recent efforts to intensify preparations for that eventuality, the economic impact would be dire. Quite apart from the shock to confidence and the loss of European goodwill, a no-deal Brexit would abruptly remove the legal underpinnings of almost half a century of economic and financial integration.
According to recent forecasts from economists at Citigroup, a no-deal Brexit would tip the economy next year into recession. By 2022, GDP would be over 3 per cent smaller than if there was a deal. These estimates are relatively benign compared with an updated worst-case scenario from the Bank of England envisaging a peak-to-trough decline in GDP of 5.5 per cent (which was actually an improvement on the 8 per cent fall it anticipated in November 2018).
Johnson’s deal may avoid the worst possible outcome, but it will still exact a heavy future cost. What matters in the long term is Britain’s new trading arrangement with the EU. That has yet to be negotiated, which is why the Tory battlecry of “let’s get Brexit done” is so misleading, the more so since reaching a new trade deal will be gruelling and protracted. Almost certainly it will require an extension beyond the planned transition—in effect, a standstill—lasting until the end of 2020.
But if Johnson stays in power—and his chances of doing so with a working majority after an early election will be enhanced by securing the deal—the direction that he will steer for Britain is clear. Unlike the close economic partnership envisaged by May, who wanted in particular to minimise barriers to trade in goods, the prime minister wants a more distant relationship with Europe.
The big prize this is supposed to deliver is an unfettered ability to strike trade deals with the United States and fast-growing emerging economies. This fails to take into account the fact that the EU has of late been no slouch in reaching new deals, from which Britain benefits as a member. These include agreements with Canada, Japan and most recently one in principle with the South American Mercosur bloc of Argentina, Brazil, Paraguay and Uruguay. Even so, hardline Brexiters believe that Britain can do even better once freed from the regulatory shackles of Brussels.
Their strategy is a triumph of wishful thinking. In order to secure a free hand in negotiating deals with distant and less important trading partners Britain is prepared to debase the relationship on its doorstep that really matters, accounting for a half of its total trade. And in striking those agreements it will lack the clout that Brussels can command thanks to the sheer size of the EU economy.
The government’s own valuations of such deals, including one with America, show remarkably modest gains. Leaked official projections in January 2018 estimated that an agreement with the US would eventually raise GDP by just 0.2 per cent. Free-trade deals with several other countries including China and India could add a further boost of between 0.1 and 0.4 per cent.
Set against such small gains in the official modelling are the much larger losses to output from a frostier relationship with the EU and the resulting higher barriers to trade. Johnson appears to want a relationship similar to that of Canada’s free-trade agreement with Europe. According to government projections published last November (incorporating benefits from new trade deals with countries outside the EU) this would bring about a long-term overall 4.9 per cent loss in GDP compared with staying in the EU. That contrasted with a loss of between 0.7 and 2.2 per cent if Britain secured the closer trade deal with Europe that May was seeking.
These are long-term projections, but what has become clear since the referendum in June 2016 is the damage that has already occurred. The Treasury got it wrong in warning before the vote that there would be an immediate recession. But the gnawing effect of uncertainty has achieved much the same result mainly by enfeebling business investment at a time when it should have been booming. According to the Citigroup research, the economy is now between 2.5 and 3 per cent smaller than would have been the case if Britain had voted to stay in the EU. That cumulative loss is not far short of the 3.6 per cent hit to GDP that the Treasury forecast over a two-year period.
If MPs do back Johnson’s deal on Saturday, this will remove the most immediate threat to the British economy. As the sharp rise in sterling in the currency markets suggests, that will be a much-needed tonic to a sick patient. Despite this short-term fillip, the direction of travel under Johnson looks set to curb Britain’s longer-term prospects, leaving the country even poorer than it has already become as a result of the referendum vote.