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26th May 2016With Westminster viewing everything through a Brexit lens, has it lost sight of the economy?

Iain Duncan Smith certainly didn’t go quietly. His resignation letter was a stinging broadside against the Conservative Party leadership, and the welfare cuts announced in the Budget just two days earlier.

The ‘In’ and ‘Out’ campaigns have competed to show how calamitous a vote for the opposing side would be, often deploying a bewildering array of statistics and projections to make their case.

Within hours of his departure, the media was proclaiming civil war in the cabinet and pundits were scrambling to assess how it would play out in the debate that has obsessed Westminster throughout 2016 – Brexit.

Ever since the long-awaited referendum on the UK’s EU membership was confirmed in February, all politics – and to a certain extent, the economy – have come to be seen through the Brexit prism.

The ‘In’ and ‘Out’ campaigns have competed to show how calamitous a vote for the opposing side would be, often deploying a bewildering array of statistics and projections to make their case.

Economics – the battlefield of choice for the Brexit debate

Even though many voters are ultimately likely to follow their heart rather than their head when making their choice, both camps frequently couch their arguments in economic terms.

One of the heftier examples was a piece of analysis conducted in March for the CBI business lobby group – which concluded that a Brexit could cost Britain £100bn and nearly a million jobs.

But no matter how thoroughly it is carried out, such research is of necessity almost entirely hypothetical.

A Brexit would be both unprecedented, and something for which there is no mechanism. Predicting what might happen requires the making of multiple assumptions. Or, as non-economists might call it, educated guesswork.

…if ever there were a time to have a good grasp of Britain’s economic position, it’s now.

But there is a danger that the conscription of economics into the Brexit argument risks distracting us from what’s going on in the economy right now.

And to do so would do those of us who care about the state of the economy a disservice. Because if ever there were a time to have a good grasp of Britain’s economic position, it’s now.

“Cocktail of risks”

In March Britain’s economic watchdog, the Office for Budgetary Responsibility (OBR), gave an unremittingly bleak assessment of the UK’s economy.

It predicted that the economy would grow by just 2 per cent this year, revising down a 2.4 per cent projection it had produced just a few months earlier.

In part these threats are global – turmoil in financial markets, falling commodity prices and a faltering Chinese economy – but there are serious problems closer to home too.

During the first few months of 2016, the OBR concluded sombrely that “economic developments have disappointed, and the outlook for the economy and the public finances looks materially weaker.”

In April the International Monetary Fund cut its forecast for UK growth in 2016 to 1.9 per cent, down from the 2.2 per cent it had predicted in January.

The Bank of England and the Organisation for Economic Co-operation and Development (OECD) have reached similar findings, and both have also revised down their 2016 growth forecasts for the UK, and in his Budget speech, the Chancellor talked of the British economy facing a “cocktail of risks.”

In part these threats are global – turmoil in financial markets, falling commodity prices and a faltering Chinese economy – but there are serious problems closer to home too.

The productivity puzzle morphs into a threat

Chief among them, according to the OBR, is Britain’s poor productivity. Productivity, a measure of how much output is produced per hour or per worker, is a key indicator of how much the economy can grow.

British productivity has stubbornly refused to improve since the financial crisis, and its continued stagnation is likely to substantially hold back economic growth, reasons the OBR.

While the British economy as a whole grew by a respectable 2.2 per cent in 2015 – making the UK’s the second-fastest growing economy among major Western nations – there are fears that growth is becoming seriously unbalanced.

Such a reversion to type risks leaving the economy dangerously exposed to any shocks that might put the service sector off its stride.

Output from both the manufacturing and construction sectors fell at the end of 2015, leaving the economy almost totally reliant on the UK’s large service sector for growth.

Such a reversion to type risks leaving the economy dangerously exposed to any shocks that might put the service sector off its stride.

But for all that, there are some reasons to be cheerful. Unemployment began 2016 at a 10-year low, and the cost of living is creeping up only very slowly. Inflation still remains comfortably below the Bank of England’s 2 per cent target.

As a result, interest rates are likely to remain low for the foreseeable future – with the markets now predicting that rates won’t rise until 2019.

The only sure thing is uncertainty

To a large degree, the Conservative Government owes its surprise 2015 election win to the strength of the economy. But almost a year on, voter confidence – and the economy’s momentum – have both taken a knock.

Whatever your view on the Brexit question, the prolonged bout of soul-searching and uncertainty unleashed by the countdown to June’s referendum can hardly be seen as having a positive impact on the economy.

For everyone but journalists and economists – who can look forward to months of employment writing about the potential permutations – the Brexit debate risks being a costly distraction from the economy’s immediate problems.

True, the fall in Sterling triggered by the Brexit debate is likely to help exporters in the short-term. But importers are counting the cost already, and those seeking investment could be forced to wait as potential backers put their investment decisions on hold until the picture clears.
Britain’s economy faces multiple threats, and the uncertainty over a potential Brexit is just one of them. So it’s both sad and myopic that it should be the one that monopolises the headlines.

Michael Davis, Managing Partner
T 020 7380 4963
E mdavis@hwfisher.co.uk


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