If you thought last Thursday morning you knew about the UK’s political landscape and its impact on the economy, you’d have been up the creek without a paddle when the exit poll came out at 10pm. For Britain’s economy now is, to use Tony Blair’s phrase, like a kaleidoscope: all the pieces are in flux. We can only guess how and when they might fall. It’s a cliche that business and markets don’t like uncertainty, but for good reason. Unfortunately, uncertainty is all we have now and for the foreseeable future. The economy had a poor start to the year, picked up a bit in the spring, but will now slow down to an anaemic rate at best. The longer political uncertainty and inertia continue, especially over Brexit, the more likely the economy stalls by the turn of the year.
You could tear your hair out, imagining political scenarios. The May government has reached an arrangement with the DUP for now, but the Conservative party will surely replace May soon and its MPs will want to try and avoid another election this year, and for as long as possible in 2018. The Fixed-term Parliaments Act provides for an election either if the government fails to win a vote of confidence or if it is overturned by a two thirds majority. But many things could turn out differently.
The DUP arrangement, leaving aside the fact that the UK government is supposed to be neutral in Northern Ireland politics so as to be able to broker stability, could flounder, leaving the Tories as a minority government for a while. Technically, the Labour Party could find itself in the same position. An election could happen sooner than anyone might want. The only certainty seems to be that since the prime minister’s credibility and authority are shot, she is not long for No 10.
How will Brexit negotiations, for which the government is still lamentably unprepared a year on from the referendum, be managed against this absurd backdrop? They are supposed to start in about a week, and will dominate, or even overwhelm, government business for the foreseeable future, spanning not just the two years provided for by Article 50 but likely far longer. Discussions about a new commercial and trade arrangement with the EU, and the raft of enabling legislation, will be immensely complicated.
“GDP growth could easily slide to 1.3-1.4 per cent by the end of 2017, and fall to just 1 per cent in 2018"Yet, who even knows on what basis Brexit negotiations will take place? The hard Brexit mandate has been crushed, and there is no parliamentary majority for it. Parliament probably has a majority for a Single Market, European Economic Area option, but that would require May or a new leader to accept the conditions that come with it, bring new clarity and realism to the debate, and face down the hard Eurosceptics in the Tory party once and for all. At the other extreme, it’s possible that Brexit could become a distant port at which the country never arrives. But that discussion is for another day.
If the sheer complexity of Brexit wasn’t onerous enough before, it just got worse in the light of a more fractious and divisive political environment. The sooner the government owns this Brexit election defeat, the quicker it will be able to move on. The danger is that incoherence will rule and that the UK will simply drift towards a cliff-edge sort of Brexit, as the clock ticks on. This would be unequivocally bad for business confidence, investment, and urgently needed domestic economic policy initiatives to help steer the economy through Brexit.
“Brexit is about to consume everything in its path, including, quite possibly, this enfeebled government itself”By way of backdrop, remember that the economy expanded by 0.2 per cent in the first quarter of 2017, with GDP 2 per cent higher than a year earlier. The annual growth rate is now going to slow down sharply. It’s most unlikely that we will match the high quarterly growth rates recorded during 2016, and so GDP growth could easily slide to 1.3-1.4 per cent by the end of 2017, and fall to just 1 per cent in 2018. Industrial production, which accounts for around 15 per cent of the UK’s economic output, has been sluggish in the first four months of the year, manufacturing weak, and housing indicators have been slipping. Capital spending has been disappointing, with little change in the overall level for about a year, and consumer spending looks quite stretched now partly because inflation is eating away at sluggish incomes, and partly because the savings rate has fallen close to an all-time low. Put another way, household borrowing capacity looks maxed out.
The government is still signed up to a balanced budget, meaning little new money for education and health, public sector pay restraint, and benefit cuts. If it survives to an Autumn budget, it might be prepared to swap some spending restraint for some tax rises (which it didn’t rule out), allow borrowing be higher in the medium-term, and shed some austerity clothes in deference to the electoral drubbing it has just had. It might try and resurrect the (in principle sensible but ill thought out) proposal to spread the tax burden across generations towards better-off older citizens. Promises to abandon the pensions triple lock and other benefits for older people were fully justified in my view.
If it has the political capacity to make some incremental changes in these areas, some economic benefits would follow. Yet for proper progress it would have to take on board last week’s OECD report: the Paris-based organisation drew attention to industries that had lost jobs, and regions of the UK which had experienced income losses and inequality. It urged the government to strengthen infrastructure spending, and policies to promote connectivity, housing and the development of knowledge industries and human capital.
This shrieks “long-term economic strategy,” which, sadly, we don’t now have a government with the strength or political capacity to devise, let alone implement. Brexit is about to consume everything in its path, including, quite possibly, this enfeebled government itself. There are political routes out of this mess, which would bring much needed certainty to all of us, businesses and households, but these would require courage and compromise.
