Brexit ... does the fu­ture look bright?

Belfast Telegraph - Business Telegraph - - Front Page - By Neil Gib­son, chief economist for EY in ire­land @Ey_ire­land Next week’s Econ­omy Watch will hear from Paul Macflynn of the Nevin Eco­nomic Re­search In­sti­tute

Can we re­ally rely on fore­casts with­out fully know­ing the terms of an exit deal, asks Neil Gib­son?

It has been a busy pe­riod for eco­nomic news in the UK and Ire­land. New eco­nomic fore­casts have been pre­sented by the IMF and the Or­gan­i­sa­tion for Eco­nomic Co-op­er­a­tion and De­vel­op­ment (OECD), the Ir­ish Bud­get was pre­sented and the Of­fice for Na­tional Sta­tis­tics (ONS) an­nounced that re­cent data re­vi­sions mean Bri­tain has £490bn less wealth than pre­vi­ously es­ti­mated.

On top of all this eco­nomic news, EY hosts its an­nual En­tre­pre­neur of the Year award in Ire­land this week, cel­e­brat­ing the in­no­va­tors who con­tinue to build world-lead­ing busi­nesses, what­ever the eco­nomic chal­lenges may be. With so much to dis­cuss, I have cho­sen to present a se­lec­tion of short sto­ries rather than com­ment on just one of these im­por­tant events.

Is pro­duc­tiv­ity nearly ev­ery­thing? No­bel-win­ning economist, Paul Krug­man, of whom I am a big fan, fa­mously quoted that pro­duc­tiv­ity is not ev­ery­thing — but, in the long-run, it is al­most ev­ery­thing. Pro­duc­tiv­ity, which is a mea­sure of how much we pro­duce for a given labour in­put, is used as a key eco­nomic health barom­e­ter and is ul­ti­mately what makes na­tions wealth­ier.

It has been vir­tu­ally stag­nant in the UK for a decade and the OBR in its Forecast Eval­u­a­tion Report has ad­mit­ted de­feat in try­ing to forecast it. Pre­dict­ing a re­turn to his­toric ‘norms’ has proved un­suc­cess­ful and, there­fore, the OBR has de­cided to set out a more mod­est pro­jec­tion for pro­duc­tiv­ity growth in the years ahead. This is re­fresh­ing.

I have long crit­i­cised mod­els for their ad­her­ence to norms, equi­lib­ria and what went be­fore to pre­dict the fu­ture.

Lower pro­duc­tiv­ity will present a prob­lem for the Chan­cel­lor as it will mean lower tax rev­enues will be forecast, im­pact­ing the Bud­get flex­i­bil­ity. Does pro­duc­tiv­ity mat­ter as much as sug­gested?

The an­swer is yes, but care must be taken with its in­ter­pre­ta­tion. If an econ­omy can ‘af­ford’ more lux­ury jobs that are lower pro­duc­tiv­ity, then the av­er­age will be pulled down even though em­ploy­ment rates may be ris­ing. For ex­am­ple, more work­ers in re­tail, care in­dus­tries, tourism and the char­i­ta­ble sec­tor would drive down head­line pro­duc­tiv­ity but pro­vide many more peo­ple with jobs.

This means we must look be­yond the head­line fig­ure and ex­plore the rea­sons for lower pro­duc­tiv­ity within sec­tors (or ideally firms). It is also im­por­tant to look at GVA (or GDP) per head to un­der­stand stan­dards of liv­ing, as this mea­sure takes ac­count of de­mo­graphic fac­tors and em­ploy- ment rates. The rea­son for a poor pro­duc­tiv­ity per­for­mance in the UK is likely to be the re­sult of a com­bi­na­tion of fac­tors:

Sec­toral mix: Em­ploy­ment is in­creas­ing in a range of rel­a­tively lower pro­duc­tiv­ity sec­tors.

Labour hoard­ing: With lim­ited pay in­fla­tion, firms have less pres­sure to shed staff.

For­bear­ance in the fi­nance sec­tor: Banks and lenders are show­ing re­straint on com­mer­cial debt, look­ing to sup­port re-fi­nanc­ing or re-struc­tur­ing due partly to the low cost of fi­nance at present and partly as a re­sult of lim­ited al­ter­na­tive in­vest­ment op­por­tu­ni­ties.

Low lev­els of in­vest­ment: Firms have re­tained profits, re­warded share­hold­ers but held back on in­vest­ing in cap­i­tal.

Struc­tural change within sec­tors: Flex­i­ble work­ing con­tracts and dis­rup­tion to tra­di­tional business mod­els have low­ered the cost of en­try into many sec­tors.

Mea­sure­ment is­sues: Par­tic­u­larly in the ser­vice sec­tor and pub­lic ser­vice, it can be dif­fi­cult to truly mea­sure GDP, es­pe­cially in ar­eas such as IP and qual­ity of ser­vice.

It is a com­plex story and one that is not eas­ily an­swered. Much re­search is needed and the OBR report is re­fresh­ing in look­ing at its own er­rors and think­ing about how to im­prove — an im­por­tant les­son for all eco­nomic fore­cast­ers.

OECD opines on Brexit The OECD an­nounced that Bri­tain would be much bet­ter off if only it could re­verse the Brexit de­ci­sion.

That may or may not be true, but the sug­ges­tion that Bri­tain’s pro­duc­tiv­ity prob­lems would be solved by aban­don­ing the de­ci­sion to leave seemed, at best, cu­ri­ous.

The UK’S pro­duc­tiv­ity malaise was in full ef­fect whilst in the EU, as were long­stand­ing re­gional dif­fer­ences also cited in the com­men­tary. It begs the ques­tion can we re­ally be sure re­main­ing in the EU would have fi­nally ad­dressed these long run­ning prob­lems? Per­haps the UK will be weaker out­side of the EU, per­haps not — there are strong European economies both in­side and out­side of the EU.

Econ­o­mists must recog­nise that their abil­ity to fore­see the fu­ture is ques­tion­able given re­cent high pro­file er­rors.

Whether it was the depth of the re­ces­sion and sub­se­quent re­cov­ery a decade ago, or the im­me­di­ate im­pact of the Brexit vote, the pro­fes­sion would be wise to be some­what less cer­tain in its pro­jec­tions of what will hap­pen.

I say this as a fore­caster — some­one who re­lies on mod­els to help with anal­y­sis and think­ing through pol­icy choices.

How­ever, with­out clar­ity on the terms of an exit deal and fu­ture trad­ing agree­ments, all fore­casts should be viewed as conditional. The de­tail of the OECD report is more re­flec­tive of this un­cer­tainty but the press com­ments were mis­lead­ingly de­fin­i­tive. If the UK was to avoid eco­nomic col­lapse when it leaves the EU, many a pro­fes­sional economist’s rep­u­ta­tion would be se­verely dam­aged.

Ir­ish Bud­get in stark con­trast In con­trast to the con­text for the forth­com­ing UK bud­get, the forecast for growth in the Ir­ish Bud­get was a very healthy 4.3% this year and 3.5% next.

These pro­jec­tions could well prove con­ser­va­tive if con­sumers, buoyed by ris­ing real in­comes, be­gin to spend more.

This in­creased spend­ing will com­ple­ment the rise in gov­ern­ment spend­ing, healthy in­vest­ment lev­els and strong trade per­for­mance (though im­port vol­umes are grow­ing).

The Bud­get pre­sented was a bal­anced one, with stamp duty on com­mer­cial prop­erty, ‘sin taxes’ and changes to the tax­ing of IP off­set­ting small, per­sonal give­aways and ini­tia­tives to in­crease in­fras­truc­ture spend.

In­ter­est­ingly, the Bud­get showed the ner­vous­ness in Ire­land re­gard­ing Brexit, which re­ceived no fewer than 17 men­tions in the speech and the words US, global and dig­i­tal (to pick three) man­aged just five be­tween them. Was this a wel­come recog­ni­tion of the chal­lenges ahead, or a slight sense of fear­ful­ness that the fastest-grow­ing econ­omy in Europe does not war­rant?

It is hard to say, but it was en­cour­ag­ing to see a focus on in­fras­truc­ture, hous­ing and keep­ing Ire­land com­pet­i­tive, even if there will clearly need to be more in­vest­ment to make this a re­al­ity.

Cel­e­brat­ing suc­cess A high­light in the EY cal­en­dar is the En­tre­pre­neur of the Year, now in its 20th year. A num­ber of no­table NI en­trepreneurs have won the award in the past and the event in City West Ho­tel is shap­ing up to be an­other ex­cit­ing evening.

Re­flect­ing back on pro­duc­tiv­ity, of which en­ter­prise is a key driver, it is al­ways re­fresh­ing to cel­e­brate suc­cess. The level of pos­i­tiv­ity amongst this year’s co­hort is truly in­spir­ing.

Risks are sim­ply op­por­tu­ni­ties if looked at dif­fer­ently and tech­no­log­i­cal dis­rup­tion is not a threat but some­thing to em­brace and on which to cap­i­talise.

Even more en­cour­ag­ing is the broad ge­o­graphic and sec­toral spread which, once again, is a re­minder that there are great busi­nesses ev­ery­where. Con­grat­u­la­tions to all the fi­nal­ists.

The OECD in­sists the United King­dom would be bet­ter off if it could re­verse the Brexit de­ci­sion

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