If Britain votes to leave the EU, then all hopes of economic recovery could sink without traceby George Magnus / December 31, 2015 / Leave a comment
It’s that time of year when economic forecasters think people really want to know what they think about economic prospects for the coming year. Ever since the financial crisis of 2008, I have often wondered why. It brings to mind the words attributed variously to Mark Twain and Abraham Lincoln: that it’s better to be silent and be thought a fool than open your mouth and prove it. So with those words ringing loud—some scene-setting for 2016.
An important reason why economists seem to be floundering nowadays is because our “discipline” has become impregnated with unpredictable politics. ’Twas always thus, as any student of the history of economic thought can confirm. But in the 1980s and until the financial crisis, it became fashionable, even a badge of honour, to claim that what used to be called political economy was no more. Now it’s back with a vengeance.
Political fracturing is making economic analysis and prediction a hazardous occupation. This is occurring globally, and in individual countries to varying degrees. The new world order trumpeted at the G20 meeting in London in April 2008 should of course have been named “new world disorder”. The US is still the only country with the capacity to offer political leadership, but lacks the will and the ability to get others to rally around an agenda. China lacks both capacity and will. No one else is in a position to offer leadership, and without the latter, the global system’s flaws go unaddressed.
For various reasons, world trade has weakened beyond recognition, causing stress for emerging markets especially. Foreign direct investment and cross-border lending and borrowing have picked up a bit since 2008-09 but the levels remain relatively subdued. With globalisation stalled, if not in retreat, the external environment for many countries has become significantly weaker and is likely to remain so. This has contributed to a growth hiatus in emerging economies, and it is by no means certain when things will change for these nations once thought to be backstops to the global economy. If anything, the tilt in global growth is away from them and towards the advanced, richer economies. The US and the EU are both large economic masses that are relatively protected from global economic storms.
In 2016, growth in emerging economies may still be running at about 4-4.5 per cent, assuming China’s official economic data are to be believed, but this is a long way from the 6.5 per cent achieved in 2011. If China’s economy is growing nearer 5 per cent, emerging market growth will be nearer 3.25-3.5 per cent. China has already shaken the world this year by mishandling the fall in its equity market and the mini-devaluation of the yuan in the summer. In the coming year, it will be important to see how China’s leaders manage the negative consequences of the anti-corruption campaign for the economy, the ambitious but largely stalled economic reform programme, and the depreciation of the yuan. In any event, China’s growth rate is still heading downwards. China’s complex politics are both the cause and effect of what’s going on in the economy.
Domestic political tensions are not unique to China, and have adversely affected economic policy-making under stressful economic circumstances in a swathe of emerging countries. Brazil, Russia, South Africa, Turkey and Malaysia are all suffering, as are many other commodity-producing countries, including in the Middle East.
In December, oil prices fell appreciably below $40 a barrel, reaching the lowest level for about 11 years. According to the International Energy Agency, slowing demand growth, the boost to supply from fracking and Saudi Arabia’s determination to maintain high levels of output, and a high 3bn barrel inventory worldwide all contributed to the oil price slump. In the coming year, experts think supply could rise further if anticipated flows from Libya, Iraq and Iran materialise. Some analysts think that the price could drop even further. Brent oil has not been at $20 a barrel, since the 1990s and early 2000s. At the moment, the impact of the low oil price on the “losers”, most notably Russia, is so far more transparent than that on the “winners”.
It didn’t have to be this way, and the Saudis and their allies might, if they so chose, still curb output enough to push the price back up a bit. But so far this is not what they want, and an agreement among Opec nations has proven elusive. If trouble in the Middle East were to flare up to the point where oil supplies would be cut, we should expect prices to bounce back with gusto, but as things stand, this doesn’t seem the most probable outcome. A further consequence of this collapse in the oil price is that the economics of Scottish independence are now well and truly torpedoed.
And as for the EU—the institutions of the EU and the Euro Area have never been under so much pressure. Grandiose plans for fiscal union and banking union have stalled. Economic decision-making will at best be the aggregation of what is going on in individual countries, supplemented by the ECB’s monetary policy initiatives, and a slight loosening of fiscal policy restraints brought about by austerity-fatigue, and importantly, the new challenge of managing large scale immigration. But think about how Europe’s politics are fracturing, and how difficult it is for stable and well supported governments to make sensible economic policies and implement reforms.
The election results in Spain serve as an example. The centre-right Popular Party remained the largest party with 28.7 per cent of the vote, but Podemos, the new party of the left, got almost 21 per cent, just behind the Socialist Party. The even newer centre-right party, Ciudadanos, fared less well than expected but still got nearly 14% per cent. It’s not clear yet whether a stable government coalition can be formed. It will have to manage an economy recovering reasonably well from the crisis, but with high levels of unemployment and private debt, as well as the festering argument over Catalan independence.
In elections in Europe elsewhere this year, it’s been the same story with the rise of new nationalistic, or radical, or anti-EU parties. In Greece, after all the shenanigans this year, Syriza still got over 35 per cent of the vote in September. In normally unremarkable Denmark, the Danish People’s Party received 21 per cent of the votes to become the second largest party. In Finland, the eurosceptic True Finns came second with almost 18 per cent of the vote. In Portugal, the new Left Bloc got just over 10 per cent of the vote, enough to ally with the Socialist Party and dethrone the incumbent conservative party that had initially claimed victory. In France, the Front National won over 27 per cent of the vote in regional elections earlier this month, and only failed to secure representation because socialist voters responded to their own party’s urge to vote tactically for the centre-right to keep the FN out.
Only in the UK have establishment parties managed better to shore up their share of the vote, getting over 75 percent in the general election earlier this year. But even so, UKIP got over 12.5 per cent of the votes. And we could now argue that one of the Labour Party’s two wings is really another anti-establishment party of the radical left, wrestling with its centre-left opponents over Labour’s identity. The real anti-establishment vote in the UK, therefore, may be right up there with what we see across the Channel.
How this all pans out in the forthcoming EU referendum is anyone’s guess. A vote to leave would have deleterious effects on the UK economy, business confidence, foreign investment in the UK—including the much-vaunted influx of Chinese investment capital. Sterling would probably take a plunge, and the cost to jobs of all this would dwarf the excited and false consciousness estimates made by Brexit enthusiasts over the costs to Britain of EU membership and immigration.
But it might not end there. It could act as a lightning rod to existing anti-EU parties and sentiment across the continent, and undermine the confidence and will of EU supporters. The best laid plans of every economist, hoping for moderate or even better-than-expected economic performance in 2016 would then sink without trace.
For what it’s worth, my bet is that UK voters will vote to stay in, obviating the need for us to worry about the dark side, and possibly even re-energising Britain’s position in Europe and in general. Happy New Year.