Don’t heed the forecasters’ gloom
Next year’s UK growth will exceed 2%
by John Redwood in London
Mon 12 Sep 2016
I think the British Treasury got its UK economic forecasts about right. In March this year the department estimated 2016 GDP growth of 2%, and 2.2% next year. This was based on the wrong assumption that Britons on 23 June would vote to stay in the European Union. The good news is this: even though the referendum vote went the other way, I see no need for the Treasury to change its 2017 forecast.
Many private sector forecasters seem to think the UK has to slash its 2017 growth estimates. The Bank of England has waded in with a forecast of just 0.8% growth next year, apparently adding another misjudged prediction to its previous forecasts. With this GDP view, the Bank is actually one of the optimists. Most other private sector forecasters are still predicting growth below 0.8% for 2017, although some have admitted they were wrong in predicting recession.
Many forecasters allege the UK will suffer a trading loss as it exits the EU. These forecasters anticipate the UK being hit by tariffs and trade barriers as the rest of Europe seeks to punish the British for daring to leave. I disagree. It’s unlikely that the other countries will want to damage their trade with the UK. Why would they want to sell us fewer cars or less wine and cheese?
In any event, we can surely all agree that this year the UK will carry on trading with the EU as a member on current terms. It will do so again for all or most of next year. Predicted trade damage for 2017 seems overdone.
Some forecasters argue companies and consumers have suffered a jolt in confidence, leading to lower sales, output and investment. Indeed, surveys of business opinion for July registered a fall in confidence, reflecting business leaders’ own disappointment at the referendum result.
As far as consumers are concerned, July retail sales figures showed a 5.9% annual increase and a gain over June, although the numbers deteriorated in August.
Housebuilders have reported higher viewings and reservations of new homes. In August, business opinion polls showed their largest gains in sentiment for 25 years, as business leaders realised they had allowed personal feelings to overcome their judgement of how customers and markets were moving.
I am a consumer. My confidence surged on the Brexit news. Like many others, I look forward to a richer country, free of the need to send so much money to the EU which we do not get back. Britain’s net contribution money, which we can now spend on our own priority areas, will eventually boost GDP by 0.6% (based on the UK's £10bn net contribution to the EU in 2014).
Credit growth and money supply growth both increased in the second quarter of 2016, implying more output growth to come. When the Bank of England on 4 August needlessly cut interest rates further, and announced yet more money creation to promote more lending, I anticipated a further growth boost.
The pound’s sharp devaluation will provide an additional economic stimulus. We see this already in tourist numbers and revenues, as well as export orders. In commercial property, large properties changed hands at good prices for the vendor, and new rental agreements were signed at high rents in central London.
It looks as if the UK can continue growth as originally foreseen. The weakness in construction has been in public sector work, not in the private sector. Government should provide some more orders as part of its wish to improve UK infrastructure and housing. There is more scope for import substitution at current levels, and much dynamism in a wide range of UK sectors.
I fail to see why so many forecasters are still looking at the UK through such dark and gloomy glasses. The figures for output, spending, money growth, credit growth, real incomes and jobs all point to continued growth in 2017. Sometimes, even the Treasury gets its forecasts right.
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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