The Pro-EU “Project Smear” Risks Distorting Our Economy

The UK economy grew by 0.6pc during the three months to the end of June, we learnt last week. You might think our second quarter growth performance, equivalent to a buoyant 2.2pc annual rate, was rather impressive. Then again, you might not.

That’s because pretty much every piece of UK economic news is currently being presented through the prism of Brexit. No matter that our vote on European Union membership was just five weeks ago. And no matter that we’re unlikely formally to quit the EU much before 2019.

That hasn’t stopped an almighty ding-dong over the interpretation of even the tiniest scrap of new data – showing the UK economy is either “booming” or “nose-diving” as a result of our Brexit referendum, the choice generally dependant on where the person commenting put their cross in last month’s ballot.

Many of those who backed Remain insist, at every turn, that the UK is doomed – and that, outside the EU, we’ll be living in penury. Leave supporters, on the other hand, are keen to show that, far from imploding, as Remain’s relentless “Project Fear” campaigning insisted, the British economy is faring quite well.

These latest better-than-expected GDP numbers certainly suggest uncertainty ahead of the Brexit vote didn’t do too much damage. The 2.2pc annual growth rate was up from 2.0pc the quarter before. Between April and June, UK industrial output jumped by 2.1pc, the strongest quarterly growth in that sector since 1999.

There was more good economic news last week, as pharmaceuticals giant GlaxoSmithKline announced a £275m expansion of its UK manufacturing sites, a show of confidence in post-Brexit Britain. The FTSE-100 also hit an 11-month high, the share index up over 6pc since the day before we voted. And the more UK-focussed FTSE-250, having fallen sharply as Leave surprisingly triumphed, has now made up all its post-vote losses.

Even the most ardent Leave supporters, though, need to admit that the picture is mixed. The rosy GDP numbers mostly covered the period before the referendum, of course, so don’t say much about the reaction to our vote. Drilling down, the UK’s vital service sector slowed from 0.6pc growth to 0.5pc, while construction output was actually 0.4pc down on the same period in 2015.

What’s more, the data suggests GDP growth during the last quarter was front-loaded, happening mostly in April. Activity in June, on preliminary estimates, looks softer – which suggests a slowdown is coming. And while the Bank of England’s “regional agents” report little sign of investment or hiring inertia among employers during July, other surveys of business confidence are more downbeat.

The truth is that, while our Brexit vote hasn’t sparked the collapse we were told it would, the UK economy faces many dangers in the months ahead. The most significant, though, have nothing to do with our decision to leave the EU.

These include the on-going systemic instability of the eurozone, the extent of which could soon be laid bare if Italy’s slow-motion banking crisis isn’t quickly brought under control. More generally, financial markets everywhere are looking vulnerable at a time when “advanced economy” central bankers are attempting, counter-productively in my view, as well as counter-intuitively, to “normalise” stocks and bond prices by pumping out ever more monetary stimulus.

Amidst all this confusion and complexity, it’s important to counter the Remain camp’s incessant negativity – the tendency to blame “Brexit” for every set-back. Given the extent to which many of our illustrious cultural commentators and broadcasters wanted us to stay in the EU, their “shock” at being out-voted, and their even greater “horror” at not getting their own way, this scapegoating of a entirely legitimate exercise in democracy has now become endemic.

Last week, Lloyds bank confirmed it was cutting 3,000 more jobs and closing 200 branches. Numerous Remain-supporting news outlets immediately blamed this bad news directly on Brexit. In truth, of course, branch closures and related job cuts are being driven by the rise of on-line banking. Eventually, Lloyds admitted these latest cuts had been determined before the referendum and, of course, were totally unconnected to Brexit.

One reason to counter Remain’s relentless negativity is that it’s part of an attempt by a large part of our political and media class to reverse this referendum result. They don’t seem to care that more people voted Leave than have ever voted for anything in British history. And they certainly don’t recognise that their commitment to EU membership, however sincere, should be outweighed by their commitment to democracy.

Now “Project Fear” is unravelling, “Project Smear” is being used to agitate for a second vote. At the heart of this effort is a determination to spread the notion that being outside the EU is economically disastrous, and that any downturn we endure in the future, as we certainly will, can only be the fault of Brexit.

So what if downturns have happened for centuries, or that the world is awash with potentially explosive imbalances, years in the making? So what if, until we actually leave, our trading rules stay the same? When the UK hits a rocky patch, as it will, then Brexit will be to blame. So let’s have another referendum and you can vote to stay in after all!

I abhor the notion of rejecting the verdict of the British people, just because that verdict wasn’t supported by the bulk of the political, financial and media establishment. I accept, though, that the victory margin was close. That’s why our Brexit negotiation team should include, at some level, representatives from both sides of the referendum divide. While Remain needs to accept defeat, Leave needs to show moderation – so we can negotiate, among ourselves and with the EU in turn, a version of Brexit which, while taking back control of our borders and restoring our broader sovereignty, attracts broad support. That will be vital in heading off calls for a second referendum, which would only generate even more division and rancor, whatever the result.

There’s another pressing reason to counter “Project Smear” – and resist the alarmist economic analysis of Brexit. That’s because such analysis is being employed to justify the re-introduction of quantitative easing in the UK and the further lowering of already historically low interest rates, while abandoning even the pretence of fiscal control. That strikes me as a very big mistake. More QE – be it in Japan, the US, the UK or the Eurozone – juices up financial markets for a while. But the sugar rush soon fades and we end up with an even bigger headache.

Back in 2009, in the immediate aftermath of the Lehman collapse, the Federal Reserve and Bank of England, between them, were creating $100-$150bn of emergency liquidity each month. Today, their Japanese and Eurozone counterparts have taken that monthly total to around $180bn, and counting. No-one knows where this unprecedented monetary experiment will end. But the extent of this virtual money-printing, while encouraged by cash-strapped politicians and celebrated by QE-hungry investment banks, is causing huge jitters across the broader world of business – a big reason why growth remains sluggish, and capital investment low, with so much cash sitting on the sidelines.

Should we really be slashing interest rates just as inflation is picking up? Should the UK be doing more QE, and abandoning attempts to live within our fiscal means, when market nervousness about too much funny money and excessive debt is already so high? I don’t think so. And I certainly don’t accept, not for one moment, that Brexit means we have no choice.

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