So, the UK is still growing quite well, despite the country voting to leave the European Union back in June. Our economy expanded, we learnt last week, by 0.5pc between July and September compared to the quarter before. That amounts to a buoyant 2.3pc annual growth rate. So does that mean everything in the UK garden is now rosy? And were Brexiteer-economists like me right? The answers are a definite “no”, and “maybe”.
What is now clear, and accepted by all but the most ardent anti-Brexit campaigners, is that the slew of pre-referendum scare stories warning of a “sudden and considerable fall” in economic activity if we backed Leave just over four months ago were nonsense.
There will be “an immediate and profound shock to our economy if we vote to leave the EU,” said then Chancellor George Osborne just weeks before the referendum. His loyal mandarins obliged, forecasting a 0.1pc drop in GDP during the third quarter of 2016 if we had the audacity not to vote Remain. Yet here we are, instead, with a 0.5pc increase.
The Treasury’s “downside scenario” went even further, warning of “a much more profound shock” – with a “credible risk this more acute scenario could materialize”. Total nonsense, the lot of it. Utter scare-mongering nonsense.
The International Monetary, The World Bank, The Organization for Economic Co-operation and Development – they were all at it. British voters endured an onslaught of blood-curdling predictions about the immediate consequences of voting Leave from important national and international public institutions that we’ve long been encouraged to trust.
The unedifying truth is that a systemic, taxpayer-funded effort was made to frighten ordinary voters into backing Remain – with the officially-sanctioned yet preposterous warning of “an immediate and profound shock to our economy” at the heart of it, repeatedly presented to voters as “fact”. The Leave campaign’s liberties with the truth – including the oft-cited use on the side of a bus of a gross rather than a net figure for the UK’s weekly contribution to the EU – while ill-judged, pale into comparison.
What we saw during the referendum campaign was a illiberal and deeply irresponsible use of state apparatus for political ends – doing lasting damage to the credibility of several vital institutions. Yes, I’m laboring the point because the deliberate and calculated misuse of public bodies by hubristic politics and ambitious civil servants matters. And because I hear not one ounce of contrition, let alone an apology, either on or off the record, from any of the people involved.
Now that’s off my chest – ahem! – I should add this latest GDP data in no way suggests the UK is out of the economic woods. While the idea of an instant referendum-induced collapse was always absurd, no-one should think all is well with our economy, Brexit or no Brexit.
For one thing, the growth we’re seeing continues to be grossly imbalanced. The UK’s powerhouse service sector, accounting for four-fifths of total GDP, surged by 0.8pc quarter-on-quarter. Industrial production, including manufacturing, in contrast fell by 0.4pc. And I’m particularly concerned at the 1.4pc drop in construction activity, given the UK’s on-going and chronic lack of housing.
It’s also worth saying that while 0.5pc growth isn’t bad, it’s below what the Office for Budget Responsibility was forecasting a year ago. As such, the UK’s fiscal position is almost certain to weaken further over the coming months. Already, during the first six months of this financial year, the government has borrowed £45bn of its £56bn borrowing target for the year as a whole.
It seems, then, we’re on for another very chunky full year borrowing total – perhaps exceeding 5pc of GDP. That’s why I find recent talk about “room for fiscal expansion”, from government and elsewhere, somewhat puzzling. The UK is already in the midst of a massive fiscal expansion – and has been for years. When does it end?
Fiscal reality looms in the shape of rising bond yields, making it more costly for the government to borrow. The yield on 10-year UK gilts has risen 33 basis points this month to 1.08pc – still artificially low, but a large proportionate rise. We already shell out more public money on debt interest than we do on defence, even at today’s rates, and will soon be spending more than on schools, as the stock of debt and rates go up. If ministers were serious about getting our public finances under control then, ahead of next month’s Autumn Statement, they’d be shouting such truths from the rooftops.
While the UK’s fiscal profligacy predates the Brexit vote by decades, yields are rising in part due to currency depreciation since the referendum. A weaker pound has made investors less willing to hold sterling assets and started pushing inflation up via dearer imports. The lower pound, on the other hand, helped British exports hit a three-year high in September, contributing to an overall growth rate that’s now outstripping America.
Given the ebb and flow of our economy, and the fact we’re still a long way from actually leaving the EU, it’s still far too early to pro-Brexit economists like me to say we were right. We should be happy at good growth numbers, despite the determination of would-be Brexit-blockers to see bad news in everything, while calling-out scare-mongering nonsense when we see it. But it would be wrong, at this stage, for Brexiteer economists to claim any kind of decisive analytical victory.
We can, though, point to positive developments that gainsay earlier doom-mongering as they happen. Nissan, in a widely-reported warning ahead of the referendum, threatened to quit the UK if we voted Brexit. Yet the Japanese car giant, the owner of the UK’s largest car plant in Sunderland, just committed itself to even more investment. We shouldn’t be surprised – the same company said it would leave the UK if we didn’t join the euro. Making threats, and extracting concessions from governments, is what big carmakers do.
Last week also saw a telling volte face from Roberto Azevado, the head of the World Trade Organization. Before the referendum, Azevado was reported as saying the UK, outside the EU, would face “tortuous” negotiations to re-enter the WTO, while incurring “billions in annual costs”. Last week, the same man, the world’s most important trade diplomat, admitted leaving the EU “was not anti-trade” and that Brexit could be “relatively straight-forward” and “smooth”.
I have never denied, even during the nastiest moments of this summer’s referendum campaign, that the Brexit process will cause some business uncertainty. While these latest growth numbers are good, there will clearly be investments currently on hold, and related future job creation thwarted, until there’s more clarity on when and how we’ll be leaving.
I’d counter, though, that remaining in the EU – with its massive instability, impending banking union and power-keg currency – is also a source a huge uncertainty, potentially greater than that related to Brexit.
I’d also say that the best way to minimize inevitable Brexit-related business uncertainty is to invoke Article 50 relatively quickly, as the Prime Minister has said, do a “grand repeal” of all EU law relating to the UK onto British statute and, after the two-year Article 50 window, revert to WTO rules. Not “Hard Brexit”, but “Clean Brexit”. Fast, clear – and, above all, democratic.
That’s the best way to encourage UK growth, trade with the rest of Europe and the world and, ultimately, long-term peace and prosperity. While these early signs of post-referendum growth are encouraging, they are only a start.