In March 2016 the Bank of England and UK Treasury forecast growth for the UK of 2% for 2016 and 2.2% in 2017. This estimate meant the UK economy was likely to be the fastest growing of the G7 countries with robust consumer spending and reasonable business and housing investment. The Bank and Treasury decided to warn that these forecasts would have to be sharply revised downwards if the UK were to vote to leave the European Union in the 23 June referendum. I disagreed.
During the referendum campaign I was asked how I could carry on saying the UK would grow at 2% in 2016 when the Bank, Treasury, International Monetary Fund, World Bank and other leading forecasters said there would be a sharp downturn, probably including a recession in the winter of 2016-17.
I argued that voting to leave the EU would make absolutely no difference to most economic variables for the first two years because nothing of importance would change during that period. I also argued that, as there had been no measurable gains or acceleration of trend growth upon joining the union, it was difficult to see why there should be any losses and a change in trend growth downwards upon leaving.
No wonder people like Michael Gove, former secretary of state for justice and Leave campaigner, pointed out that citizens had become critical of experts who were espousing the negative consequences of exiting the EU. The experts were comprehensively wrong before, about the European exchange rate mechanism and the euro, and have been again with short-term forecasts for the UK after the Leave vote. Unfortunately, they compounded their earlier false forecasts by making big downwards revisions in their projections for both 2016 and 2017 immediately after the referendum. They also rushed out early large-company opinion surveys to create an impression of broken confidence.
Meanwhile consumers kept spending, businesses kept finding good demand, car output hit a record for this century, new jobs were created and cash was invested. Last week the Bank recognised that the UK did indeed grow at 2% in 2016, the best G7 result. It also decided to improve its forecast for 2017 to 2%, more than double its lowest forecast after the referendum.
Leaving the EU is a significant constitutional and political decision, but is unlikely to have much impact on the UK economy. Britain already does a good deal of trade with fast growing and large economies that are not members of the EU under the World Trade Organisation’s most-favoured-nation rules, and will be able to conclude some more free trade deals.
If the EU imposes tariffs on UK-European trade it will harm the remaining member states more than Britain. The UK would make a good profit from imposing reciprocal tariffs on the EU itself, and will be able to give tax cuts or grants from the revenue to offset the negative impact. Tariffs are very low on average on British exports, given the large volume of services which are tariff free. If the EU does not want a full free trade agreement, trading under most-favoured-nation terms will be fine for the UK.
Some worry that the UK will lose access to service markets if the EU withdraws the passport rights that permit businesses which are regulated in the UK to operate freely in the EU. This again would be a silly kind of attempted self-harm, as the rest of the EU has more passports into London than UK based businesses use on the continent. If the EU were to do so, businesses could get along perfectly well using the doctrine of regulatory equivalence to allow them to continue doing business from London.
Experts warned that London would lose lots of business if the UK did not join the euro, but instead London flourished. The same old warnings are no more believable this time.
John Redwood is the Member of Parliament for Wokingham, Chairman of the Conservative Economic Affairs Committee and a former Secretary of State for Wales. He is the author of several books on European monetary union and British politics.