But hardline Leavers are always hesitant to put their money where their mouth isby Jonathan Portes / February 11, 2019 / Leave a comment
No deal? No problem—or, at least, no recession. According to the Financial Times, “the consensus is that the UK will avoid a recession in any scenario.” The February forecast from the National Institute of Economic and Social Research suggests that while no-deal would mean no growth to speak of in 2019, this would be stagnation rather than outright recession.
Some no-deal enthusiasts were quick to seize on this, with Jonathan Isaby of BrexitCentral tweeting “Another Project Fear prediction out of the window.”
I disagree. But there’s little point in debating Isaby, or indeed anyone else with similarly dogmatic views, on this; far better to see if they actually believe what they say. So I asked if Isaby would put his money where his mouth was, and offered a bet—£1,000 that, in the event of no-deal on 29th March, the UK would see a recession in 2019.
No takers from Isaby or any of the other prominent Brexiteers who retweeted him. Economists call this sort of performative but ultimately empty posturing “cheap talk”; people on Twitter tend to refer to it as “virtue signalling.” But Dilip Shah, who is a more than competent economist (and certainly has a better forecasting record than I do) did. So the bet is on.
Now, while I think the odds are in my favour, I don’t think this is easy money. Over the long-term, the economic impact of Brexit will be largely driven by our future trading and migration arrangements with both the EU and the rest of the world. Under almost all plausible assumptions, these will reduce UK trade and immigration, and therefore growth. Hence the strong consensus among economists that Brexit will mean that we will be somewhat poorer than if we stayed in the EU—although there’s plenty of uncertainty about how much.
But the short-run impact of no-deal is, paradoxically, far harder to predict. How to model the disruption to supply chains on which much of British manufacturing depends? Will stockpiling, either by firms or households, actually push up demand and hence output in the run-up to 29thMarch? Will both sides put in place measures to mitigate the immediate impacts of no-deal—for example on transport, financial services and the like—or will the political atmosphere between the UK and the EU27 be so poisoned, particularly if the UK refuses to pay the financial settlement agreed as part of the Withdrawal Agreement, that the relationship breaks down completely?
And, perhaps most importantly, remember that demand in the UK economy is driven primarily by consumer spending, which in turn depends on confidence. Predictions of a sharp downturn immediately after the June 2016 referendum were driven by the assumptions about the impact of uncertainty on consumer spending and business investment that were mostly wrong.
My prediction is that this time will be different. Businesses will be hit by rising input prices, resulting both from a likely fall in sterling and the need to replace EU imports with more expensive ones sourced from outside the EU. Consumers will face rising inflation at a time when they will be trying to reduce discretionary spending, and with little prospect of large pay rises. Any actual disruption to business activities, through the disruption of supply chains, cutting off access to EU export markets, or the loss of EU workers, will come on top of this—and could be very severe indeed.
Dilip could still be right—in fact he’s predicting that no-deal would lead to the economy shrinking in the second quarter of 2019, but then recovering in the third quarter rather than entering a technical recession, particularly since he expects some manufacturers to shut down in April and reopen when things have returned to normal. This could happen—but it would require goodwill on both sides, followed by some sort of resolution, whether temporary or permanent, that allows trade to continue with only modest new barriers, and deals with a huge number of complex regulatory issues. Not impossible—but very optimistic in my view.
So just how bad will it be? Philip Tetlock, the author of Superforecasting: The Art and Science of Prediction, argues that anyone who makes predictions needs to be able to assign numerical probabilities to different outcomes, so that their performance can be measured. In this context, I think that’s wrong. Any numerical prediction mixes up judgments about economic impacts with speculation about political developments, and is more likely to confuse than inform—look at the Bank of England’s “scenario analysis” that was widely (mis)-interpreted as predicting an 8 per cent fall in GDP in the event of no-deal.
So I’ve been very unwilling to put a number on what would happen to UK growth after no-deal. As with other phenomena, like climate change, we face not just quantifiable risks, but unquantifiable uncertainty—Donald Rumsfeld’s famous distinction between known and unknown unknowns. But, again as with climate change, that should make us more, not less, worried. And if anyone tells you no-deal will be fine, ask them if they’re prepared to bet on it.