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The Effect of Brexit on the UK Economy

By Dr John Sydenham.

It should be remembered that the UK voted to leave the EU largely for political reasons and the predictions that it would be an economic catastrophe were taken as a price worth paying by those who voted Leave.  That said, what has happened to the economy since leaving?  To answer this question we will need to remove other factors such as COVID and unrelated changes in international trade and finance from the analysis.

The obvious way to do the comparison is to compare the UK with other countries.  Fortunately the World Bank maintains an extensive and highly respected Databank for international comparisons.  If you click on the link you can check most of the data given below. When comparing countries over decades there are confounding factors such as population, inflation and currency exchange rates but again the World Bank comes to the rescue by providing data that allows for inflation and exchange rates (constant $US) and providing data expressed per head of population (per capita).

Gross Domestic Product (GDP) is a measure of the total earnings of a country in a year.   The effect of population can make it seem as if countries with relatively low GDP are poor,  it looks like being Australian is a raw deal:

However, if we look at the per capita figure we get a truer story of who is rich and who is poor:

The truth appears to be that being Australian is excellent if money is what you desire.  However, we cannot rest at per capita figures adjusted for inflation because the prices of goods and services, especially the prices of vegetables and property, vary a lot between countries because of local factors such as climate (Spain) and overpopulation (UK).  The local cost of living is incorporated by using the "Purchase Power Parity" (PPP) figure for GDP.  PPP adjusts earnings according to the local cost of a basket of goods and services.  According to this figure Australians are not much better off than most Europeans. 

The Americans are still very well off indeed however it is not great being poor in the USA but that is another story. 

This suggests that the honest way to assess the effects of the EU Referendum and Brexit on the UK economy as it affects us is to look at PPP per capita.  However, if you want our free-booting business people going round the world making deals the GDP per capita in constant 2015 $US is as good a measure.  Let us zoom in on 2008 to 2020.

The honest judgement must be that the referendum had no effect on our personal wealth. Australia, Canada and Italy had extremely similar growth to the UK after the Referendum and all the other countries were not much different.  Compared with the financial crisis and COVID 2016-2019 were wonderfully stable periods for all of the countries above, including the UK.

The graph for national GDP, without adjusting for population and local prices (see top),  shows a similar picture.

How accurate were the predictions for what would happen after the Referendum?

Many economists and agencies made predictions for what might happen between the Referendum and actually leaving the EU.  These historical predictions are useful because they allow us to assess whether the agencies were incompetent and/or biased.

People tend to forget that it was the Conservative leadership who were keenest on Remaining in the EU.  David Cameron and George Osborne commissioned the Treasury to produce predictions for what might occur if the UK voted to Leave.  The Treasury report before the Referendum, called HM Treasury analysis: the immediate economic impact of leaving the EU was so extreme that everyone who supported Leave called it "Project Fear". This report was about the effect of the Referendum, as Osborne's preface explained:

The Treasury predictions for what would happen after the Referendum were truly catastrophic:

There was to be a 4% to 5% drop in GDP within about a year.

The Treasury predictions were not just wrong, they were absurdly wrong.  We have to ask why this shocking error has never been covered fully in the mass media.

The only prediction that was half right was that the pound was falling: "the analysis shows that the fall in the value of the pound would be around 12%".  This prediction was actually based on the fall in the pound due to the Euro crisis coming to an end after 2014 and had little to do with the Referendum:

The predicted fall of 12% was supposed to have disastrous results: "unemployment would increase by around 500,000, with all regions experiencing a rise in the number of people out of work. The exchange-rate-driven increase in the price of imports would lead to a material increase in prices, with the CPI inflation rate higher by 2.3 percentage points after a year. " but similar falls in 2012 and over the previous two decades were scarcely noticed by commentators at the time.  Only falls that were much larger than the Treasury's predictions had a serious effect.  Yet "the Referendum caused a huge fall in the pound that damaged the UK economy" is an article of faith in UK mainstream media.

Source: Macrotrends

The fall in the pound at the time of the Referendum was sudden because it was a sell off of previous speculative purchases but it was not the sort of change that would create 500,000 unemployed or any sort of crisis. Fluctuations in exchange rate on that scale occur all the time.  There was no massive fall in the pound due to the Referendum - the fall was small - and the pound only fell to the value it would have had anyway because of the ending of the Euro crisis and the appalling UK Balance of Payments deficits.

Fortunately we can now see from the historical data that the Treasury Report was indeed "Project Fear".  Its GDP, inflation, employment and other predictions have been shown by history to have been wildly inaccurate.

That the UK media took the Treasury predictions seriously at the time shows that there is a problem with the professionalism of Economics Correspondents. It is also astonishing that broadcasters like the BBC have, to this day, refused to cover the fact that the Treasury Predictions were so wrong.

Predictions for After Leaving the EU

The UK left the EU on the 31st January 2020 and the Transition Period ended on December 31st 2020.  The various economists and agencies involved in predicting the changes after the Referendum cannot really be trusted to predict the next phase of leaving the EU.  What is amazing however is that some, such as the OBR are sticking to their guns in the face of the evidence.  As a reminder, the period 2016 - 2019 shows no obvious evidence that the UK economy was affected by the EU Referendum compared with other economies.

The OBR says in its predictions that "Our November 2020 EFO was conditioned on the broad-brush assumption that the additional trade barriers associated with leaving the EU would reduce the long-run productivity of the UK by around 4 per cent. The full impact was assumed to take 15 years to be realised. Around two fifths of the 4 per cent impact has effectively already occurred as a result of uncertainty since the referendum weighing on investment and capital deepening."

What is going on here is that the OBR is attempting to salvage its reputation by diluting the predictions into such small amounts that no-one can say whether they are true or false.  As an example, two fifths of the "fall in growth due to brexit" since 2016 amounts to 0.32% a year. No economist can successfully predict GDP to within 0.32% so the OBR can maintain it was right even if it was wrong.  No economist can predict 0.32% change in GDP per annum over 5 years or 4% over 15 years. Few can even predict 18 months hence let alone 15 years into the future. (See GDP predictions are reliable only in the short term (Economist Dec 15th 2018) )

Accurate GDP growth predictions are extremely difficult because it is so variable:

The UK had an apparently good year in 2014 and fell more between 2014 and 2016 than it did between 2016 and 2019. However it would be as fatuous to claim that the EU Referendum had saved the UK from a further falls as to say that it had caused 0.32% fall in GDP per annum after 2016.  As the Economist article (Economist Dec 15th 2018) says, GDP cannot be predicted with such accuracy and sophists who might argue that they are predicting a steady, small pressure in a particular direction that does not show up in a particular year should be reminded that they could easily be unaware of similar, tiny pressures in the opposite direction.  Ultimately all that the OBR are saying is that they wanted the UK to Remain in the EU.

Their current prediction for leaving the EU in the long term is that it might negatively affect the economy over the next 10 years by 2.4%.  This is only 0.24% per annum.  It is a prediction that can never be tested because even small fluctuations in trade, let alone an event like COVID or the Financial Crisis, will happen again in the next 10 years and invalidate their predictions.

The OBR prediction is pointless and worthless.  This has not prevented the mass media from giving the 4% figure prominence (usually without any note that the 4% is over 15 years or that such predictions are impossible). 

As a reminder of how the UK economy performed relative to other economies here are the GDP outcomes for 7 countries:

According to the OBR UK GDP was supposed to be 1.6% lower.  But who can tell?  Brexit was predicted to be such a small effect that it is invisible in the GDP data and could be overwhelmed by any number of other factors.   No economist can predict GDP to the accuracy required for the OBR predictions.  Had there been no Brexit everyone would have been happy with the figures.  Had the OBR not been staunchly Remain it would have stated that the Referendum had little, if any, discernible effect on the economy and fully leaving the EU would also have little discernible effect.

The OBR, on the basis of the absurd predictions analysed above have stated that "Brexit will be worse than COVID".  The OBR have shown themselves to be politically biased so can be discounted from predictions about leaving the EU.  What do other organisations predict?  Especially the people who hope to make money out of getting the predictions right.

A collection of 17 commercial forecasts puts UK GDP growth at an average predicted value of 7% for 2021 and 5% for 2022.

The Statista organisation produces long term forecasts for most of the countries in the world which provides international comparisons:

But notice that although Statista and the 17 forecasters both agree that the UK will grow fast in 2021-2022 - by about 12% - there is a large disagreement about when exactly the growth will occur.  Predicting growth beyond 2 years is almost impossible.

There is little sign of Brexit being worse than COVID in any of these predictions.  Again, had the UK not left the EU the commentators would have just thought that it was "business as usual".

Avoiding the bouncy annual GDP growth figures the overall outlook for UK GDP is fair:

The UK is expected to do as well as any other developed economy in Europe except Germany.  We will need to wait until 2023-4 to get any certain view of how the UK economy is performing.

Why is Germany doing so well?  The Euro was a huge boost to Germany.  The Deutsche Mark had a high exchange rate and this limited the mercantilist approach to international trade practiced by the Germans. However, as a result of joining the Euro Germany can trade with a currency that has a lower value than the Deutsche Mark because it is set by the whole EU.  Furthermore, in the terms of the introduction of the Euro, Germany has little liability for the economic and social conditions in other parts of the EU (unlike, say, the South East of England which subsidises other parts of the UK).

Is the cunning of Germany to be praised?

29/10/2021


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