Fear not! The doomsters of Brexit have got it all wrongComments Off on Fear not! The doomsters of Brexit have got it all wrong
The run-up to the EU referendum on June 23 was not short of claims about the dire economic consequences that would follow were the British public to decide to leave the European club.
And Project Fear appeared to be vindicated in the immediate aftermath of the vote, with a series of gloomy surveys suggesting that the economy was on track to fall into recession.
But the past two weeks have seen a rapid bounceback in some of those selfsame surveys.
And the first piece of “hard” economic data to cover the post-referendum period showed spending by shoppers surging by 1.4% in July. Economists had predicted a mere 0.1% rise.
So let’s take a step back and consider Brexit coolly. Those claiming that serious damage to the economy is inevitable frequently pepper their arguments with references to “confidence” and “uncertainty”.
But, handily for the pessimists, these are vague concepts and problematic to measure.
Even the effect of uncertainty on investment by firms, which many consider particularly vulnerable to a lack of clarity over the UK’s future relationship with the EU, is not clear-cut.
For businesses operating in competitive markets, adopting a wait-and-see approach before investing risks losing market share to more nimble, risk-taking competitors.
Moreover, a cynic might note that Brexit’s supposed damage to sentiment offers a convenient excuse for businesses to explain away bad results and policymakers to mask their own failings.
Take the latter as an example. Since 2009, the economy has experienced the weakest recovery in post-war history.
The case for more support from monetary and fiscal policy has been compelling for a long time — a case which the EU vote has finally forced policymakers to recognise.
There is no doubt the package of rate cuts and other measures announced by the Bank of England, and the Government’s abandonment of its obsession with cutting the budget deficit, represent some major silver linings in any Brexit cloud.
More broadly, one has to question whether those particularly gloomy about the UK’s prospects are simply overblowing the scope for shifts in policy regimes (of which leaving the EU is an obvious example) to seriously affect the economy’s underlying performance.
Consider the fact that the US and Sweden, two countries that have been at opposite ends of the spectrum in terms of their approaches to capitalism, have achieved virtually the same annual average growth in income per person since 1980.
Or take the creation of the European single market in 1992. Growth in UK living standards since 1992 has been significantly lower than in the same period preceding the creation of the single market, an observation that is at odds with the plaudits that are often thrown at the EU’s supposedly prize creation.
In practice, history shows that economic success or otherwise depends heavily on two things.
One is a set of macroeconomic policies that keep demand and spending up.
The other is a healthy supply side — a well-trained workforce, high-quality institutions, protection for property rights and the right incentives to work and invest.
The Brexit vote has forced policymakers to wake up to the need for the first.
The second is largely domestic in nature — with happily the UK, and London in particular, among the world leaders in many key areas.
Under very different circumstances in 1933, US President Franklin D Roosevelt spoke of “the only thing we have to fear is fear itself”.
It is still very early days for the UK in a post-referendum world but Roosevelt’s words would seem worth remembering when the purveyors of Brexit doom and gloom come calling.
Martin Beck is lead UK economist at Oxford Economics