Shock horror, some reports suggest that the UK will fall into recession thanks to the Brexit vote, others say nonsense, all is fine. Both sides are talking rubbish.
The UK is still in the EU. The UK may not leave the EU for years. Why is it then that some people are saying that the Brexit vote may cause a recession later this year?
I don’t want to dwell for long on the hard data. But it cannot be ignored, altogether. The purchasing managers’ indexes tracking the UK economy in the few weeks after the Brexit vote point to negative growth. But then for there to be a recession, there has to be two quarters of successive contraction, all we have so far is anecdotal evidence that one month may have seen contraction.
Retail sales appear to have been quite robust in July, the labour market figures were encouraging. But really, I fail to see why the Brexit vote should have affected these figures in anyway whatsoever.
So far most of the economic effects of the vote have been minor – background noise in the great orchestra of the UK economy.
Sure the pound has fallen, but that is not so remarkable. Against the euro it is about one cent lower than the low price of just three years back. That does not strike me as so significant. Okay it is lower against the dollar, but then the dollar has been strong worldwide.
Where Brexit may have had an impact is on investment, with some companies reluctant to invest in the UK in the wake of the referendum. All we have so far is anecdotal evidence, and it is to a large extent contradictory.
There is evidence that the UK government has cut back on infrastructure spending, but that has nothing to do with the referendum, more to do with austerity and how difficult it is to get planning permission for anything these days.
Some people say that the Brexit vote is a good thing, because as a result, the Bank of England has cut interest rates. Such logic makes no sense, it is akin to say; “oh thank goodness, there is bad news on the economy, that means rates will be cut.” That is an absurd argument.
Others say that as result of the Brexit vote the UK government will put austerity on hold and open up the coffers. This is also faulty logic: austerity could have been postponed/cancelled/turned into stimulus with or without the Brexit vote.
Brexit will affect the economy, but it depends.
Before the UK can leave the EU it has to enact Article 50, and then we are on a two-year deadline. But there is a view doing the rounds that it would make no sense to do this until the 2017 elections in Germany and France have been decided. So that may mean a year’s delay before the two-year process of Article 50 begins, but a lot can happen in a year.
Maybe by then the truth will have dawned on people that because of underlying demographic forces, if anything the flow of immigration is likely to go into reverse. EU immigration always was a red herring.
Whether the UK is better off in or outside of the EU depends on deals, in particular it depends on trade deals involving services.
The UK is good at services, much of the world has a natural tendency to be protectionist with services. The much lauded trade deal between the EU and Canada does not apply to services.
Brexit may or may not support the UK economy, but we won’t have the answer for years. Until then, we will just get noise.