“The economy, stupid.” Pinned to the wall, this motto famously reminded Bill Clinton’s campaign staff to stay on message as he ran for the US presidency in 1992. Somebody may want to pin it up in the UK Conservative party’s headquarters, because the party has instead managed to involve the entire country in its bitter little civil war over Europe. But economies can survive some rough handling by politicians. Amid the Westminster turmoil, how is the UK economy doing?
The stiff-upper-lip response is that it’s fine. There were some grim forecasts of the short-term impact of a referendum vote to leave the EU, most prominently a shock scenario presented by the Treasury under George Osborne, and they did not come to pass. The UK economy sailed through the surprise result, demonstrating that Project Fear was nothing more than scaremongering — right?
The truth is not so rosy. As independent experts predicted, the economy has been disappointing since the vote to leave. By “disappointing” I mean relative to pre-referendum forecasts that assumed a vote to remain, relative to other leading economies, to “what-if?” models, and to historical trends.
Alone, each of these comparisons is open to question. Put them all together and they start to look persuasive to anyone with an open mind. The unpredictable Brexit process has created enormous ambiguity for any business dependent on investment or trade across borders, and knock-on uncertainty for other businesses that work with them.
One index of UK policy-related economic uncertainty has a baseline of 100. It hit 500 after the referendum and has exceeded 300 again this year. But we don’t need an index to tell us that the outlook is unclear. This lack of clarity matters. Some businesses are delaying investments while they wait for the fog to lift. Others are choosing countries where things seem more predictable.
Further trouble awaits. Agreeing a variant of prime minister Theresa May’s deal now would resolve uncertainty at the cost of isolating the UK’s service economy from the single market; a long delay offers the hope of stronger connections with the huge European economy, but prolongs the confusion; leaving without a deal would not only cause short-term disruption, it would restart the interminable process of negotiation as we try to figure out the ground rules on pretty much everything.
Yet, like Boris Johnson when foreign secretary, one might simply declare: “f**k business”. Who cares about disloyal corporations when our concern is with ordinary, hardworking citizens? The trouble is that while UK residents are indeed hardworking — the employment rate and the unemployment rate are both breaking the right kind of records — they are not seeing much income in return for their hard work.
As the Resolution Foundation think-tank concluded in February, Brexit has hit living standards even harder than it has hit growth. Annual household labour income has been falling for two years and is around £1,500 lower than it was projected to be before the referendum. (Memorious readers will recall that during the referendum campaign the Treasury predicted that a vote for Brexit would lower household incomes by £4,300 a year by 2030. In this respect, at least, Brexit is slightly ahead of schedule.) Not all the disappointment can be attributed to Brexit, but much of it has been caused by higher inflation as a result of the Brexit-induced drop in the value of the pound.
We should remember that all of this occurred while the international economy has been buoyant. The consensus now is that the world is due some sort of slowdown. That isn’t going to help, except perhaps to make the UK look a little better by comparison. Alas “better by comparison” does not pay the bills.
Of course, the news hasn’t all been bad. The UK’s jobs market remains genuinely impressive. Given what we know about the depressing effect of unemployment, even low-paid, low-productivity jobs are better than no jobs at all.
Another bright spot has been the public finances: the deficit is under control and tax receipts have outperformed (modest) expectations, albeit because of a surge in the incomes of the richest 0.1 per cent of taxpayers. It is worrying that inequality may be starting to increase. Still, revenues are revenues, as well as being a reminder that high earners do have their uses.
The awkward truth that Remainers and Leavers alike need to face is that the UK’s economic performance was disappointing long before the referendum. Measured by gross domestic product per head, many regions were worse off in 2015 than in 2007. London’s growth, while modest, was far better than the slump in Wales, the north of England, and particularly Northern Ireland.
And overall, in the wake of the financial crisis, the UK suffered a decade without growth in average earnings — the worst performance since the 1860s, according to Paul Johnson of the Institute for Fiscal Studies.
In brief, then: the chicken of economic weakness produced the Brexit egg, from which further economic woe is hatching. As problematic breakfasts go, this one is the Full English.
Written for and first published in the Financial Times on 5 April 2019.