Johnson’s political sophistry is no fix for Britain’s economic travails

A remarkable feature of the election was that the economy, usually centre-stage in the campaign, counted for so little. But it will come to the fore now, determining whether Boris Johnson can consolidate his triumph at the polls or whether his lustre will soon fade. Whether the economy performs well or badly will be crucial in determining living standards and the ability of the Treasury to finance better public services, above all the NHS.

The neglect of the economy in the election was particularly odd given how poorly it has been doing this year. Official figures released just two days before the election showed that activity had ground to a standstill in the three months to October. On the basis of these numbers, Garry Young of the National Institute of Economic and Social Research estimates growth of 0.1 per cent in the final quarter of 2019. Taking the year as a whole, he now expects growth of just 1.3 per cent. That would be the lowest since 2009 when GDP shrank drastically in the wake of the global financial crisis.

The Bank of England forecast in early November that the economy would grow in 2020 at the same sluggish pace as in 2019, but on the brighter side, it expected a pick-up in the course of the year, to 1.6 per cent by the final quarter of 2020. However, that projection was based on “an orderly transition to a deep free trade agreement,” said Mark Carney, the Bank’s governor, on 7^th November. That assumption has been swept aside by the Conservatives’ commitment in their manifesto, launched on 24^th November, not to extend the transition period following the planned Brexit in January, beyond the end of 2020. That has rekindled worries about a hugely damaging no-deal Brexit, tearing the economy out of the customs union and single market in which it will remain during the transition period.

The one certainty about 2020 is that the hardening of the Conservative stance during the election will foster further uncertainty. This will continue to gnaw away at the economy as firms suspend or retrench their capital projects. The Bank of England said in its November monetary-policy report that the uncertainty generated by Brexit has been “a key factor in the stalling of business investment” since the referendum vote in June 2016.

The self-harming would not matter so much if the world economy were in a better place. One reason why former chancellor George Osborne’s prediction of an immediate recession following the Brexit referendum turned out to be wrong was that there was a subsequent surge in global growth, which rose to 3.8 per cent in 2017 on International Monetary Fund figures, the strongest since 2011. That helped British exporters, especially since Britain’s main trading partner, the European Union, grew strongly as the 19-strong euro area at its heart put on a turn of speed.

But that uplift has since turned to a chilly downdraft, which has brought global growth down to its lowest in this decade. Figures from the Organisation for Economic Co-operation and Development in late November estimated that growth would be just 2.9 per cent in 2019. Trump’s protectionist measures have contributed to a wrenching slowdown in world trade growth, which has particularly hurt manufacturers and weakened investment. The heavily exporting German economy at the hub of the euro area has slipped from growth of 2.8 per cent in 2017 to just 0.6 per cent this year on the OECD figures.

At best, the world economy is likely to stabilise in 2020 rather than to improve. The OECD expects growth to stay at 2.9 per cent. If anything the balance of risks is tilted to the downside, say economists at Citigroup. In a note on 9^th December they cited a range of factors such as trade tensions, political uncertainty, a dwindling in America’s recent growth outperformance and a spread of global manufacturing weakness to as yet more resilient domestic oriented service sectors.

As ever in economics there will be some offsetting factors. One is that Chancellor Sajid Javid’s giveaway spending round in September will provide a moderate fiscal stimulus when it starts to take effect in the financial year starting next April. And to the extent that the rise in sterling keeps down prices, consumers will feel a bit better off though exporters will find the going harder. Overall, however, the British economy looks likely to remain stuck in 2020 at around this year’s sluggish growth rate. The OECD thinks it could do even worse, forecasting a rise in GDP of just 1 per cent in 2020 (followed by 1.2 per cent in 2021).

More worrying still is the state of productivity growth, since that is the mainspring of rising prosperity in the long term. Measured as output per hour worked, productivity rose by only 0.5 per cent a year between 2010 and 2018. That is an extraordinarily slow pace; between 2000 and 2008 (a bad year for the economy), it grew at an annual rate of 1.7 per cent. More recent performance is even worse. Productivity in the second quarter of 2019 was 0.5 per cent lower than in the same period in 2018.

Against this dismal background it is difficult to be optimistic about the outlook for productivity gains in the early 2020s. For one thing, the dearth of business investment will take its toll on efficiency. For another, trade spurs higher productivity through greater competition and Brexit will hamper commerce with the EU, which accounts for half of total British exports and imports.

Johnson may have prevailed at the polls but overcoming British economic weaknesses, many of which are longstanding, demands more than electoral sophistry. Rhetorical flourishes and political evasions are irrelevant in the Treasury spreadsheets that spell out hard truths. What lies ahead is a slow-motion economy that will undermine the claims of a rosy post-Brexit future and expose the fiction that higher spending on public services can be achieved without tax increases.