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Analysis

5 reasons economists’ Brexit warnings weren’t wrong

by Vicky Pryce | 12.03.2018

The Chancellor’s spring statement is likely to reignite the row about who correctly predicted the impact of Brexit: the pessimistic “Remainer” economists who make up the vast majority of the profession or the very small number of economists in favour of Brexit?

Here are five points to keep in mind.

1. We haven’t left yet

What’s more, de facto membership – albeit without participating in decisions from next March – is likely to continue through a 21-month transition period at least. The whole point of the transition is to cushion the blow of Brexit, so it’s not surprising there hasn’t been a bit hit yet. This stopgap period was never factored into forecasts from either side of the debate.

2. Global economy is growing fast

The UK has been helped by a strong recovery in world trade and a pick up in exports, particularly to the rest of the EU, which is enjoying the fastest growth in years. Nevertheless, Brexit uncertainty is being blamed for the UK growing at the slowest rate in the G7 group of large industrialised nations. Before the referendum, we were the fastest growing.

3. Fall in the pound

Economists were right to warn about a sharp fall in the pound. While this has helped exports, the consumer has lost out as was feared. The pound buys us much less abroad and inflation has risen sharply to 3%; in the month of the referendum, it was only 0.5%.

4. The domestic picture

Much of the domestic growth and employment we have seen has been due to the Bank of England cutting interest rates and buying vast quantities of government bonds through its Quantitative Easing programme. Today with prices rising faster than wages, we are beginning to see the fallout in the retail sector and more widely as the consumer is reining back. And interest rates are on the way up.

5. Quick decisions by Philip Hammond

Philip Hammond’s wise decision to abandon George Osborne’s fiscal rules straight after the referendum vote also helped cushion the blow. Although the Chancellor is likely to announce a lower than expected deficit for 2017/18 this will be from a worsening scenario he has had to face. Don’t think this is cost-free: a higher debt to GDP ratio will be a burden to taxpayers for a long time to come.

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Edited by Hugo Dixon