Is there life after Brexit? Who dares make any prediction these days, without the risk of being caught out by some diabolical political twist and somersault at Westminster?
More than I can ever recall, politics has clouded the economic and financial mood – and the impenetrable fog of Brexit that has reduced us to a state of neurosis.
And now, if the chaos that has engulfed the EU referendum was not enough, SNP policymakers are locked in an internal battle over demands to establish a separate Scottish currency in the event of the party securing and winning a second independence referendum. Pressure is building on the party to create a new currency in the early days of an independent state. Foreign exchange controls and a hard border between England and Scotland? Just what we need!
But to despair is a sin, and it is surely time to look at what our prospects may be post Brexit. Personally, I believe there is every prospect of a ‘Deal Dividend’ – that after the immediate hullabaloo over our EU exit has subsided there will be an economic and investment bounce. Political uncertainty is a killer for business.
The economist Chris Dillow calculates that were policy uncertainty to fall back to its post-1997 average, the dividend yield on the All Share Index could fall by one percentage point – implying a 30 per cent rise in the UK’s notably depressed share prices, or an uplift of £650 billion.
But market behaviour is never so mechanistic or linear, and there are other factors bearing down on our prospects, chief among them a global economic slowdown. So it was with some apprehension that I attended a presentation yesterday by Paul Johnson, of the Institute of Fiscal Studies, held at the Pensions and Lifetime Savings Association conference at the Edinburgh International Conference Centre. It was grandly titled: “The UK’s Post-Brexit, Post-QE Outlook and Investment Environment.”
As with other economists, Mr Johnson likes to take a long run-up before he leaps into prediction mode, and his address was no exception: he highlighted the miserable performance of the economy and productivity in particular over the past decade and launched the magnificent under-statement: “I think we’re on the brink of things that are not necessarily good.”
Back in March 2008, then Chancellor Alastair Darling forecast that the UK economy would grow by an average two per cent a year over the next ten years. In fact, there has been a 20 per cent undershoot, while GDP per head has barely grown at all since the last recession. This makes the past decade the worst on recent record in terms of recovery, while productivity forecasts have been consistently over-optimistic. “We are in a new period, one in which we have been consistently disappointed.”
As for the current outlook, growth forecasts for the UK are stuck at around 1.5 per cent for 2019 – and are heading lower, due to a slowdown in the global economy, evident from China to the Euro zone. For example, the latest Bank of England ‘scenario’ is for UK growth to fall further, to just 1.2 per cent, compared with 1.8 per cent previously.
This presents a problematic background for Chancellor Philip Hammond’s Spring Statement due next week. The one bright spot is that the budget deficit is sharply down – from £147 billion at the peak to just £20 billion and heading towards just one per cent of GDP – absolutely trivial by historic standards.
The dilemma for Mr Hammond is now whether to end the austerity era for Government departments outwith international development and the NHS – local government spending, in particular, continues to be badly hit – and go for a ‘Bazooka’ style package, or whether he feels constrained by Brexit uncertainty and the need to keep bearing down on overall government debt, still a colossal £1.7 trillion. His Autumn budget effectively blew the latest deficit improvement on the NHS. Could he now do the same for other spending departments?
More borrowing is Mr Johnson’s hunch. We are back to the future, it seems: but little wonder that in all the Brexit fog what goes round ... well, comes round.