Disproving the doomsayers
Forecasts of Brexit’s economic impact overdone
by John Redwood in London
Fri 26 Aug 2016
The overdone pessimism whipped up by a very political Treasury before the UK’s referendum on European Union membership was based on a short-term shock to confidence. It said that if the public dared to vote for Leave the loss of confidence would be rapidly visible. House prices would tumble and housing transactions would decline. Interest rates would go up, making mortgages more expensive. Spending and output would fall as consumers reined in discretionary purchases. Unemployment would rise as firms cut back and cancelled investment programmes.
The good news is that, nine weeks after the vote, when the UK should have felt the worst of the immediate shock, none of this has come to pass. The only correct forecast was that the pound would fall. Contrary to the gloomy forecasts, shares have risen after an initial petulant mark-down. Government bonds have soared, including before Bank of England’s 4 August intervention, cutting interest rates to all-time lows.
When the first surveys of big business opinion came out shortly after the result, they were pessimistic. That was not surprising: many big company executives wanted to remain and had personally involved themselves in the losing campaign. The Remain faction among the investment banks and commentators seized on the surveys as proof that the recession the Treasury had forecast would come to pass.
Some actual data of what is happening to jobs, house transactions and consumption is now in the public domain. It’s good news. Persimmon, one of the UK’s largest housebuilders, has reported a 20% increase in visitor interest, along with a 17% increase in reservations for new homes in the weeks following the vote. House prices remain at similar levels to 23 June, save for the top end of central London, where they have been declining since much higher taxes were introduced in April. A survey by the Royal Institution of Chartered Surveyors has pointed to modest house price gains in the year ahead, and more transactions.
Claimant count figures for July show that unemployment fell in the month after the referendum. Retail sales figures for July 2016 were 5.9% higher than in July 2015, while the volume of cars produced in the UK rose by an impressive 7.6%. There has been strength in hotel, bar and restaurant takings, and clothing – all discretionary items, illustrating consumer confidence.
Money and credit growth had started to accelerate before the vote, indicating future economic growth. The Bank of England has needlessly added stimulus to what was a satisfactory money position. It has had to amend its May warning of a recession and now estimates 2% growth this year, 0.8% next year, and 1.8% in 2018.
This is no recession, though the Bank maintains that growth will be close to stalling this winter. The figures I have seen suggest that growth next year will be at least one percentage point higher than the Bank’s 0.8% forecast. It is high time that those who put out such negative forecasts before the referendum revised their view and explained why they got it wrong.
Brexit’s longer-term impact will not be known until we have actually left the EU. It should be positive, though it will be influenced in modest measure by how we trade in future with the rest of the Union.
John Redwood is MP for Wokingham, Chairman of the Conservative Economic Affairs Committee and a former Secretary of State for Wales.
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