Brexit will be built on weak economic foundations

A series of major reports have highlighted both the economic risks of Brexit and the long-term difficulties of the UK economy. First came the OECD, predicting that France, Germany and Italy would all grow faster than the UK in 2018, partly because of the uncertainty caused by Brexit. Then the Bank of England warned of “weaker real income growth” as the UK economy adjusted to Brexit. Finally, a London School of Economics (LSE) report showed that the UK’s productivity is so far behind that of its major rival that German productivity is greater in all but three of the 168 economic areas that make up the UK.

Meanwhile, the Federation of Small Businesses survey of its members found business optimism at its lowest level since the referendum. They talk of the “unprecedented political and economic uncertainty” caused by Brexit. The further downgrading of the UK’s credit rating after Theresa May’s Florence speech, directly linked by Moody’s to the “increasingly apparent challenges to policy-making given the complexity of Brexit negotiations”, made the same point in a different way.

Brexiters like Boris Johnson are constantly claiming that the UK will be able to grow further and faster outside the EU than in. They criticise Remain voters as defeatists for suggesting otherwise. Certainly no British patriot wants to argue that British economy will be finished if we leave the EU. We all want a more prosperous country for our fellow citizens. But we do differ fundamentally on the contribution of the EU to reaching that goal.

The UK’s difficulty is that Brexit comes on top of years of underperformance.  For example, Portugal, one of the eurozone countries worst affected by the financial crisis, has turned a budget deficit of 9% in 2012 to one of 1.5% last year.  By contrast, the UK’s deficit in 2016/17 was 2.4%. Worse, for all the talk of Brexit boosting our exports, Portugal has increased its exports from 29% of GDP five years ago to 45% today but the UK can only manage 28% now.

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The LSE report is a dismal reminder of the UK’s long-term failure to raise its productivity to anything like the levels of its main competitors. For every hour worked, the French and Americans generate about 30% more income than Britons; Germans produce 36% more. It is true that these figures are open to interpretation but what cannot be challenged is that the UK is not as productive as it could or should be.

Since the referendum the 12% fall in the pound has pushed prices up and squeezed wages. Exports have only risen modestly and imports have increased. Interest rates will probably rise in 2018. This is a poor foundation on which to base an entirely new, non-EU centred economic policy.

But that is what the UK is going to have to do if we leave the single market and the customs union. Yes the hardest of hard Brexits, which would trigger a 27% cut in UK exports, knocking a whopping 6.3% off GDP according to Bank of America Merrill Lynch, is less likely if the prime minister can maintain the line she advanced in her Florence speech. But even if the UK were to quickly sign trade agreements with non-EU countries and increased our exports to them, that would offset only a small proportion of the losses from Brexit.

At present there is no evidence that the UK will be able reap a bonanza from Brexit.  The evidence that we do have points to a reduced level of economic activity as trade with the EU becomes more difficult. To recognise that is not to be defeatist about the opportunities for Britain after Brexit but realistic. Given that Brexiter promises that a trade deal with the EU would be “one of the easiest in human history” have proved to be wide of the mark, such realism is prudent.

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Edited by Hugo Dixon