It’s official: economy doing fine after Brexit
It is the fact of the day, a nugget of information that will delight Brexiteers and reassure corporate Britain. The Office for National Statistics believes that output in the dominant services sector rose 0.4pc month-on-month and 2.9pc year-on-year in July. This is the first real, official output data after Brexit, and it’s better than even I– a relative optimist – had expected. It confirms not just that there was no immediate economic collapse after the referendum vote, despite the political vacuum and financial market turmoil, but that the economy continued to grow at a very decent rate. All the business surveys that pointed to the opposite outcome were wrong, and should from now on be treated as far less useful by the financial establishment.
Several economists have now upgraded their third quarter GDP estimates to 0.4pc, twice the Bank of England’s prediction. If this or something like it eventually materialises, this will be not just humiliating for the Bank but will further undermine the rationale for cutting rates and bolstering QE. Extreme monetary policy comes with many side-effects; it should only be used in a real economic emergency.
Remarkably, capital spending drove the economy in the second quarter, which ran until the end of June and included the referendum campaign. As a result, the overall economy grew by 0.7pc, driven by investment growth of 1pc, an expansion in capex that was twice as large as previously estimated. This matters, as careful readers of the infamous pre-referendum “HM Treasury analysis: the immediate economic impact of leaving the EU” will remember.
That preposterous piece of propaganda based much of its reasoning on the assumption that companies and other investors would have frozen their activities in the runup to June 23. In fact, all of part two of that report – at least six pages – was predicated on the idea investment was retarded by the very fact of the referendum campaign, as opposed to its result, as Andrew Lilico of Europe Economics points out.
The truth is that the costs and benefits of Brexit were never about any supposed immediate shock caused by sentiment and animal spirits. They are about the medium and long-run: whether Brexit Britain ends up becoming a more open, better place that encourages work, investment, entrepreneurship and productivity growth, and whether, on balance, we become a more rather than less freetrading nation. The specifics of the Brexit deal we negotiate therefore matter greatly – but they are hardly the whole story. Other trade deals are also part of the cost-benefit equation which will determine Britain’s economic success over the next few years.
The good news is that the business establishment has become more sensible: it is now agitating for the best possible Brexit deal rather than seeking to reverse the referendum. On Thursday, Nissan asked for in indemnity against any possible future tariffs, in return for which it would invest more in Britain. It’s a clever negotiating strategy from the car industry, and other manufacturers will presumably join in. They have, on balance, benefited enormously to date from the lower pound, of course.
In the same vein, TheCityUK’s lobbying document, produced by Oliver Wyman, is expected to claim that 7,000-70,000 jobs would be lost, depending on the trade deal in place with the EU. Given that there are close to 1.1m financial services jobs, a loss of 7,000 would be less than the usual, annual variation in a highly cyclical industry. A 70,000 reduction would be a blow. Of course, all of these figures need to be taken with a bucket of salt: this is lobbying, negotiation of a sort that bankers are good at. They have a long record of exaggerating the hit from previous political decisions, including since the crisis.
But even though the Government should take all of these claims and threats in the right, sceptical spirit, it should also put all of its efforts into maximising the UK’s access to overseas markets. We need the best possible trade deals with the EU and the rest of the world after Brexit: the freer the trade, the lower the barriers, the smaller the tariffs, the better off everyone will be. allister.heath@telegraph.co.uk
‘Extreme monetary policy should only be used in a real economic emergency’