Vicky Pryce is chief economic adviser at the Centre for Economics and Business Research and a former joint head of the Government Economic Service.
Brexiters who crowed that Europe’s slow growth meant the UK was “shackled to a corpse” should stop smirking. The supposed corpse is very much alive and showing Britain a clean pair of heels. The latest batch of forward-looking business surveys reveals eurozone companies struggling to meet growing demand. Confidence among German firms has never been as high, with managers “euphoric”.
After the referendum, Leavers boasted that the UK was growing faster than the rest of the EU in 2016, proving what a good decision it was to exit. Slow-moving Europe, they said, was an increasing irrelevance for fast-growing developing nations that are now the powerhouses of the world economy.
In fact, growth rates last year were about the same – 1.7% in the EU and 1.8% in the UK. And now Europe is showing signs of forging ahead as Britain falters. The eurozone grew 0.5% in the first quarter compared with the fourth quarter of 2016, while the UK expanded by just 0.3%.
Quarterly figures provide only a snapshot, so it makes sense to step back and look at the big picture. What do we see? Of course, it is good news that growth in the UK has been sustained. That is due to a considerable extent to the extraordinary support the Bank of England provided for the banking system after the referendum by resuming bond purchases and cutting interest rates.
But the BoE’s ultra-easy policy has also pushed consumer borrowing to record levels that are now beginning to concern regulators. Households themselves are turning more cautious as prices rise faster than wages. That is partly because the post-Brexit slump in the pound, while helping exporters, has pushed up inflation.
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No wonder that a new survey of Britain’s top 50 retailers by the Korn Ferry Institute showed 40% were pessimistic about the year ahead, an increase of a third from 2016. Brexit was one of their top concerns. Brexit uncertainty has also kept business investment weak, while the target date for eliminating the government’s budget deficit keeps being pushed back. The Conservative party’s manifesto sees no balancing of the books until 2025.
The economy is still doing quite well. The BoE recently downgraded its 2017 growth forecast to 1.9% from 2.0% but it marked up its projection for 2018 and 2019 by the same margin, to 1.7% and 1.8% respectively. Unemployment is at its lowest rate since 1975 and the number of people in work is at a record high.
But the composition of UK growth is worrying. Despite the hugely beneficial exchange rate, manufacturing expanded just 0.3% in the first three months over the fourth quarter of 2016 and the trade deficit more than doubled to £10.5 billion. What’s more, the deficit would have been even wider had it not been for Europe: the value of UK exports to the rest of the EU, by far our largest trading partner, rose by 5.7% in the first quarter, while shipments to non-EU countries fell by 3.8%.
Why was that? Quite simply, Europe’s recovery is finally gathering steam. Industrial production is rising at its fastest pace in six years. The election of French president Emmanuel Macron, who campaigned on a platform of revitalising ties with Germany to strengthen the eurozone, is set to raise confidence further.
Economic growth is not a zero sum game. As negotiations on the terms of our divorce from the EU get underway, it’s not too late for Brexiters to acknowledge not only that Europe is doing well but that we should be pleased that Europe is doing well.
Edited by Alan Wheatley
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