DON’T BLAME ALL OUR WOES ON BREXIT

The EU vote is a scapegoat for all ills

Oh, what a state we’re in – and all because of that wretched Brexit vote. Apparently. The economy is grinding to a halt. Business investment has dried up. Consumer spending is flat. The pound has fallen and pensions have been hit. It will take years to negotiate all those new trade deals. Business confidence has been dealt a massive blow. And the future? It looks dire.

A miserable list of worries has emerged since that fateful referendum vote in June to leave the European Union. We have been warned, from a deeply gloomy Fraser of Allander Institute Bulletin to the forecasters at Ernst & Young, of slowing growth and a 50-50 chance of slipping into recession.

There’s no denying that Brexit has cast an immediate cloud of uncertainty over our economic prospects. For decades, the EU has been a central feature of daily life for households and businesses alike. Not only did the vote to leave confound almost all official predictions, but the resignation of David Cameron and the prospect of a long drawn-out Conservative leadership election seemed to leave the country rudderless. For several weeks it looked as if we were spinning out of control.

Given this – and the dire warnings from George Osborne in the final days of the Remain campaign of £30 billion of spending cuts and/or tax increases if we voted to leave

may be hit in the autumn. But the Bank of England’s cut in interest rates to a record low of 0.25 per cent and related measures to boost bank lending should address any concerns about a shortage of money being available to customers. The referendum vote has also highlighted a worrying international context – one that was deteriorating long before Brexit and which cannot be regarded as having been caused by it. Context here is important. Back in February, a sombre G20 meeting moaned that policies in the wake of the global financial crisis had been less effective than expected. In April the International Monetary Fund once again lowered its forecasts for the world economy, to growth of 3.2 per cent this year and 3.5 per cent next, against previous estimates of 3.4 per cent and 3.6 per cent respectively. And in June – again before the referendum – the World Bank slashed its 2016 global growth forecast to 2.4 per cent from the 2.9 per cent estimated in January due to stubbornly low commodity prices, sluggish demand in advanced economies, weak trade and diminishing capital flows. Now, with the Brexit vote, a simpler and more local explanation has come to hand. But do we really believe that, without Brexit, this wider economic and financial outlook would have been significantly brighter? ‘There are too many weaknesses in the world’s politico-economic structure to allow much optimism,’ writes the economist Stephen Lewis. ‘It is structural weakness rather than any specific event, be it Brexit, a Federal Reserve rate hike or a shift in China’s foreign exchange policy, that is the cause – there seemed little room for doubt that we were in for a torrid time. But how badly has our economy been hit to date? And how much is Brexit to blame for the troubles that we certainly face?

Take, for example, the warnings that consumers would draw in their horns as a result of ‘ Brexit uncertainty’, and that household spending would be depressed.

But figures for July show that spending increased by 1.6 per cent compared with last year. It was also significantly higher than the 0.9 per cent annual rise in June. Hotels, restaurants and bars recorded an annual growth rate of 8.9 per cent in consumer spending. Recreation and culture saw a 5.2 per cent annual increase, while spending on food and beverages was up by 5.1 per cent. There was also a 3.9 per cent increase in spending on clothing and footwear.

Now it’s true that worries persist that spending on ‘big ticket’ items

‘It is structural weakness rather than any external

event, Brexit or otherwise, that is the cause of the malaise’

of the malaise. The events are at most merely triggers.’

As for Scotland, the latest reductions in growth forecasts follow more than a year of such downgrades. Much of recent commentary has proceeded as if the vote on 23 June was the sole or main cause of the difficulties we face. But we must guard against muddling cause and catalyst. Many of our economic problems are deep-seated and have been a source of concern for years.

Take, for example, the current slowdown in Scotland’s economy. Much of this has been blamed on Brexit uncertainties, but official Scottish government figures show that this could not be the case. Those figures reveal that there was no growth in Scotland’s economy at all in the first quarter of the year – well before the referendum and even before the campaigns got underway.

This zero-growth reading followed a series of warning signs including falls in employment levels, construction output and business survey results. Over the last four quarters, Scotland’s Gross Domestic Product (GDP) rose by just 0.6 per cent. And, relative to the UK, Scotland has been growing more slowly, with UK growth over the last four quarters up by 1.7 per cent.

What has been weighing on Scotland’s economy over this period is the dramatic slowdown in North Sea exploration and development in the wake of the oil price collapse. This has been felt right across the business world as hundreds of specialist and engineering service suppliers have had to cut back production and lay off staff as orders fell sharply.

At the same time, Scotland’s construction sector has been trailing the rest of the UK due to many of the larger infrastructure projects such as the new Forth crossing nearing completion. Construction sector output fell by 1.5 per cent in the first quarter – worrying in itself, but depriving Scotland’s economy of any boost from what had been its fastest-growing sector over the past two years.

Here the Brexit vote could prove a catalyst and a positive game-changer. And so it has proved. The Scottish government has now responded with proposals to bring forward support for job-creating projects and arrangements to help businesses. Nicola Sturgeon has said she will allocate an ‘additional’ £100 million for projects in this financial year.

This is good news – and a positive response to the infrastructure hiatus that has been bothering many. But here’s a mystery. The administration has long complained that it has been strapped for cash because of ‘Westminster austerity’. So where is this additional £100 million coming from? It has been found from capital funding in the 2015-16 Scottish government budget that wasn’t spent. In fact, a total of £155 million budgeted for spending was left unused.

The ‘extra’ (sic) £100 million will be provided this financial year to accelerate delivery of health and other infrastructure projects, details of which will be announced in due course.

Perhaps if t he cash had been spent as originally planned last year, we would not have had this ‘Brexit consequential’. But how useful it is in economics to have something external to blame.