What are the economic consequences of Brexit?

After all the uncertainty in the UK we will have some sort of progress in that we will have an election putting the voters at least briefly in charge. Whether that will solve things is open to debate but let us take a look at what the economic situation will be should the UK start to actually Brexit from the European Union. The NIESR has looked at it and the BBC has put it in dramatic terms.

Boris Johnson’s Brexit deal will leave the UK £70bn worse off than if it had remained in the EU, a study by the National Institute of Economic and Social Research (NIESR) has found.

That is a rather grand statement which fades a little if we read the actual report which starts like this.

The economic outlook is clouded by significant economic and political uncertainty and depends critically on the United Kingdom’s trading relationships after Brexit. Domestic economic weakness is further amplified by slowing global demand.

The latter is somewhere between very little and nothing to do with Brexit. We are in a situation where the 0.3% quarterly GDP growth declared by France this morning looks good in the circumstances.

This brings us to the first problem which is that the NIESR is predicting that sort of growth for the UK.

On the assumption that chronic uncertainty persists but the terms of EU trade remain unchanged, we forecast economic growth of under 1½ per cent in 2019 and 2020, though the forecast is subject to significant uncertainty.

So where is the loss? As it happens they have predicted 1.4% economic growth which is as fast as the economy supposedly can grow these days according to the Bank of England.

We think our economy can only grow at a new, lower speed limit of around one-and-a-half per cent a year. We also currently think actual demand is growing close to this speed limit. This means demand can’t grow faster than at its current pace without causing prices to start rising too quickly.

I am no great fan of this type of analysis but remember we are in the Ivory Tower Twilight Zone here. Now let us factor in the problems the Ivory Towers tell us about business investment.

Prior to the EU referendum, UK business investment growth was growing in line with average growth across the rest of the G7. Since then, it has risen by just 1% in the UK, compared to an average of 12% elsewhere……..DMP Survey data suggest that the level of nominal investment may be between 6%–14% lower than it would have been in the absence of Brexit uncertainties. ( Bank of England August Inflation Report)

So there is potentially quite a bit of business investment growth in the offing. How much? I do not know but it could quite easily be a sizeable swing. That view rather collides with the statement below from the NIESR.

We would not expect economic activity to be boosted by the approval of the government’s proposed Brexit deal. We estimate that, in the long run, the economy would be 3½ per cent smaller with the deal compared to continued EU membership.

So the business investment was not held back but lost forever?

They do however seem to have a rather extraordinary faith in the power of a 0.25% interest-rate cut.

In our main-case forecast scenario, economic conditions are set to continue roughly as they are, with output close to capacity but underlying growth remaining weak and well under its historic trend. Real wage growth is supporting consumer spending, but weak productivity growth means that the current pace of expansion may not be sustainable. Rising domestic cost pressures are offset to some extent by slower import price growth and CPI inflation is forecast to remain close to target. In line with our previous forecasts, fiscal policy is being loosened. This, together with an expected cut in Bank Rate next year, is supporting economic growth in the near term.

Odd that because surely we would not be here if interest-rate cuts had that sort of effect. Looser fiscal policy does seem to be on the cards whatever government we get next and the rising real wages point is interesting as it means they are not expecting a fall on the value of the UK Pound £.

Also there is very little there which is anything to do with Brexit at all. I note that they have no idea what inflation will do so they simply say it will be in line with its target. Indeed

underlying growth remaining weak and well under its historic trend.

is where we are these days and economic growth being supported by fiscal policy makes us sound the same as France which last time I checked is not Brexiting at all.

Finally we do get to a proposed loss.

Compared to our main-case forecast, uncertainty would be lifted but customs and regulatory barriers would hinder goods and services trade with the continent, leaving all regions of the United Kingdom worse off than they would be if the UK stayed in the EU.

Now we have it! There is of course an element of truth here as there are gains from being in the Single Market. But the reality is that we do not yet know what out future relationship will be and even more importantly how economic agents will respond to it.

Bank of England

There were some extraordinary reports last night emanating from ITV’s Robert Peston. I think that Robert is desperate for attention but as the son of a Labour Peer he is extremely well connected to say the least. So let us note this.

I’ve been aware for some time that the prime minister and chancellor have a preferred candidate to be next governor of the Bank of England – and it is none of the five who were interviewed a few weeks ago (Cunliffe, Bailey, Broadbent, Vadera, Shafik) and passed the the competence threshold.

If the competence threshold was one passed by Nemat Shafik then even the world’s best limbo dancer must be unable to get under it. For newer readers she was made a Dame and put in charge of the LSE to cover up her early exit from the Bank of England which happened because she was out of her depth. Indeed is she is in play then this suggestion would at least give us a laugh.

It’s….Rebekah Vardy.

Actually matters got more complex as the issue of whether it was appropriate now was raised and the issue of any likely international candidate (Raghuram Rajan )was raised. Then there were the possible political style appointments which Robert ignored presumably on the grounds that it was fine when the current incumbent espoused views with Robert himself might have made but might be something rather inconvenient looking forwards.


We find as so often that what is presented as fact has strong elements of opinion attached to it. In economics that is driven by the assumptions made in any economic modelling which are usually more powerful than actual events. An example of this was provided by the UK Office for Budget Responsibility back in 2010. It predicted we would now have Gilt yields of 5% and would have seen wage growth at the same level for some time. In reality we have a 50 year yield o just over 1.1% and wage growth has maybe made 4% for a bit after years of way under-performance. On that road 3.5% GDP growth starts to look more like a rounding error. So will there be an effect? Yes as we adjust, but after that it will be swamped by other developments.

Returning to the role of Bank of England Governor then perhaps Mark Carney just like QE and low/negative interest-rates may be to infinity and beyond! Perhaps a daily extension this time around?