A phoney war over Brexit and the British economy

A phoney war over Brexit and the British economy

The impact of the departure from the EU will only be known in the medium term

YESTERDAY

In the run-up to last year’s referendum on membership of the EU, the Remain campaign and a host of independent forecasters warned that a Leave vote would inflict immediate pain to the economy.

In the event, aided by a prompt loosening of monetary policy by the Bank of England, the UK rode the shock without too much difficulty, with growth remaining robust and healthy in the second half of 2016.

This year, however, the economy has run into a degree of trouble. Anaemic growth of 0.2 per cent in the first three months was followed by another sluggish expansion of 0.3 per cent in the second quarter.

As yet, these are not disastrous signs of weakness. A rise in prices after the sharp fall in sterling following the Brexit vote has eaten into real incomes, but retail growth seems to have been strong in the second quarter.

Any serious Brexit shock is likely to come in the medium to long term, as uncertainty grows over the shape of a deal with the EU and if the UK opts for a harder exit detrimental to future prospects. Accordingly, the best economic policy right now would be for the government rapidly to inject some realism into its negotiations with the EU, starting with the terms of a transition.

Optimists for post-Brexit Britain were cheered this week by BMW’s decision to produce its electric Mini car in the UK rather than elsewhere the EU. Given that the automotive industry is one of the sectors whose supply chain is threatened by border barriers between the UK and EU, this looked like very good news.

Such confidence is somewhat overdone. The UK plant will undertake a relatively small part of the value-added of the car, much of which, including the all-important battery, will be made in Germany. And most of the Mini’s investment cycle will probably be covered by a transition period in which the UK stays in the single market and the customs union. The impact of a hard Brexit on investment and participation in international supply chains remains to be seen.

That point was made earlier this week by the International Monetary Fund, whose gloomy pre-referendum predictions about the UK economy have been much mocked by Brexit supporters. On Monday, the IMF revised down UK growth for 2017. But its new projection of 1.7 per cent was still only 0.2 percentage points below that for the eurozone, and the fund left its forecast for 2018 unchanged.

Labelling the UK the sick man of Europe is premature and could easily become a self-fulfilling prophecy. However, as the fund emphasised, its relatively sanguine forecast of medium-term UK growth is predicated on an optimistic assumption about the outcome of the exit talks.

In a sense, the UK is in a period of phoney war over the economic impact of Brexit. Companies are ratcheting up warnings of damage from a hard Brexit, but the threat has yet to cause a serious economic shock. The UK government’s talks with the EU are proving sticky, but they have yet to collapse or lurch towards a cliff-edge exit. Indeed, with a majority of the Bank of England’s Monetary Policy Committee commendably prepared to keep interest rates low, the economy has some support.

What could boost confidence is for the government, rather than posturing over citizens’ rights and the exit bill, to get on with securing the closest trading relationship possible with the EU following its departure. That the UK economy has not suffered more from Brexit uncertainty comes more by luck than judgment.

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