By Professor Aditya Goenka
Department of Economics, University of Birmingham
“Troubled times had come to my hometown”
(Springsteen, 1986)
Since the Brexit vote in June 2016, the British economy has been slowing down, with the growth rate in the last quarter of 2018 at just 0.2%, the slowest since 2012.
This should be seen in the context of what is happening in the global economy: the average growth rate in OECD countries in 2018 was 2.37%, while in the UK it was 1.3%. The consensus is that the uncertainty over Brexit has led to the poor performance of the UK’s economy. This has been detailed in the Bank of England’s Inflation Report of February 2019, when the Monetary Policy Committee (MPC) unanimously agreed to hold interest rates at 0.75%.
In a recent speech, Gertjan Vlieghe, a member of the MPC, estimated that 2% of GDP has been already lost due to the Brexit uncertainty – which amounts to 40 billion pounds per year, or 800 million pounds per week. This dwarfs the promised Brexit dividend to be delivered for NHS spending.
Consumer spending
As yet, trading has not changed. In the immediate aftermath of Brexit, as the standard textbook macroeconomics would predict, individuals and households looking to smooth consumption increased their spending. Consumption was brought forward due to the effects of higher anticipated inflation increasing due to the depreciation of the pound and falling real income.
The increased consumption was financed through increased consumer borrowing – with unsecured debt (excluding mortgages and leases) at 15,400 per household or 30% of household income. The opinion was that inflation and slowdown would be temporary. If the increased inflation and decrease in real income are prolonged, then we would expect consumption to start slowing down – as is now the case.
Decline in investments
While investment in G7 countries increased by 7%, in the UK it fell to zero and was -3.7% in 2018. Business leaders have clearly stated that it is economic uncertainty related to Brexit (see the recent disclosures on warnings given by Honda going back to 2018) that has led to a fall in investment. The decision made by the car industry to move future production out of the UK has rightly received a lot of media coverage, but this has already impacted the sentiment and outlook across many sectors. Companies such as Sony, Panasonic and even Dyson, have moved EU headquarters from the UK; banking and insurance are moving business and funds out of UK (Barclays is moving large part of its business including 166 billion pounds of funds to Dublin; Deutsche, JP Morgan, Goldman Sachs, Citigroup and Morgan Stanley about 750 billion euros).
Employment and the job market
Employment has remained buoyant – this is a combination of decreased migration and firms substituting by using more workers to compensate for a lower investment. This may not last long as the impact of job cuts and closures in manufacturing, and the effects of decreased investment, start to percolate in the economy.
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Whatever the nature of Brexit, the damage has already been done to the British economy. Even if there is no Brexit, the European headquarters of multinationals such as Sony, Panasonic, the European Medical Agency and the European Banking Authority will not return to the UK. The damage to the reputation of the UK for providing a stable regulatory and institutional environment for business to thrive in has been damaged. This will make the UK a less attractive place to invest in. There will be no quick fixes to restore reputation through tax cuts or through diluting regulation.
Describing the economic and social transformation of the US in the 1960s, Bruce Springsteen wrote the iconic song, Hometown. One fears that the UK will face a similar situation due to the uncertainty that has grown over the last two-and-a-half years.
“Now Main Street’s whitewashed windows and vacant stores
Seems like there ain’t nobody wants to come down here no more
They’re closing down the textile mill across the railroad tracks
Foreman says these jobs are going boys and they ain’t coming back
To your hometown.”