Ambrose Evans-pritchard:
The Governor of the Bank of England made two Pinocchio assertions on the Today programme on BBC Radio 4 yesterday. One was categorically false; the other was sophistry dressed in pseudo-science. Both give credence to Remainer canards. They therefore become political instruments.
Mark Carney has been a good Governor. I do not share the widespread view among Brexiteers that the Bank disgraced itself two years ago as a supporting chorus for Project Fear. It is the guarantor of financial stability. It had to plan for the worst.
This is in sharp contrast to the Osborne Treasury. George Osborne threatened a pro-cyclical punishment Budget that would have set off a recessionary downward spiral. The Bank of England, of course, did the exact opposite after the referendum. It cut interest rates and doubled down on quantitative easing (QE). It built up a shock absorber. This was a welladvised insurance policy. But Carney now needs to rein in his emotional bias on Brexit.
The Governor stated – perhaps unconsciously lapsing into a Kensington dinner party view – that the UK had fallen to the bottom of the G7 growth league. This claim is repeated so often that it has taken on the status of established fact. Many assume it must be true. It is not.
The early evidence this year is that Brexit Britain is growing faster than France under Emmanuel Macron, the Gallic wunderkind supposedly reviving animal spirits. Britain grew 0.2pc in the first quarter, the same as France (revised data in both countries). Japan contracted by 0.2pc.
We do not yet have the UK figures for the second quarter but the National Institute of Economic and Social Research said its GDP tracking monitor suggests 0.4pc growth. France and Italy have already published. They are both on 0.2pc. Broadly speaking, the UK is puttering along in step with the sluggish eurozone. I would certainly accept that the economy has slowed a bit as a result of Brexit, but it is less than I feared. The descriptions of a crippled economy spinning into crisis that pervade the global press coverage of Britain have degenerated into caricature.
Ah, but what about last year? It was indeed a poor year for the UK in relative terms. Yet the economy still grew 1.7pc, the same as Japan. Italy grew 1.5pc. Last time I looked, Italy was still in the G7.
Britain’s lacklustre performance in 2017 needs context. The low-hanging fruit of the post-lehman expansion had been picked. The UK had closed the “output gap”. It was running into capacity constraints and hitting its speed limit. (Too low unfortunately, but that is a story of stalled productivity that has nothing to do with Brexit.)
By contrast, the eurozone still had slack. It had yet to complete a V-shaped catch-up. The output gap was enormous in the South. The stars aligned in 2017: EMU fiscal austerity ended; the European Central Bank was printing money with gusto; banks finally had emerged – stunned but alive – from regulatory overkill.
Meanwhile, the UK was still in the grip of austerity. The Chancellor carried out net fiscal tightening of 0.6pc of GDP last year. I base this loosely on the “cyclically adjusted” budget balance in the IMF’S Fiscal Monitor. The G7 as a whole was basking in net fiscal stimulus. The US let rip. The eurozone was roughly neutral. If you adjust for all the variables, there is no Brexit slump. It is propaganda.
Carney made a second claim. He began by stating that the direct loss in GDP due to Brexit has been 1pc. Then he added that the synthetic loss is
‘The Biblical script in hard Remainer circles is Brexit lopped 2pc off GDP. He went out of his way to validate it’
nearer 2pc once you take account of the remedial actions of the Bank of England. Excuse me. What is this extraordinary concept dished out at our breakfast table, a hideous twisting of the counterfactual?
Britain’s unemployment rate is the lowest in 42 years. The economy is at full capacity. If it had been growing a full percentage point faster over each of the last two years, overheating would have run rampant.
The Bank of England would have had to raise rates much faster. The pound would have been much stronger (not good). The UK might have stolen a bit of extra growth from the future by running the economy hot but once you do all the arithmetic, the flattened figures over the medium term would have been more or less the same. There has been no 2pc loss in GDP. It is self-evident rubbish.
What struck me about the Governor’s remark is that it smacked of spin. The Biblical script in hard Remainer circles is that Brexit has lopped 2pc off GDP. He went out of his way to validate it.
The pro-eu Centre for European Reform (a worthy body, but not on this occasion) has been making the running with a study based on a macroeconomic algorithm. It concludes that the “cost of Brexit so far” has been 2.1pc of GDP. This claim has been repeated all over Europe as if it were hard fact.
The algorithm compares UK growth with three main control countries. One is Hungary, currently in the grip of a blow-off boom driven by loose policies. A second is the US, currently in the grip of a reckless “Peronist” late-cycle blast of debt-driven fiscal stimulus that will come back to haunt it. These are the controls? It is not analysis. The algorithm is pastiche.
The Governor is certainly right that no-deal is “highly undesirable”. Even a British assertion of full selfgovernment on WTO terms requires a deal to avert cliff-edge stupidities. The £39bn exit fee should be contingent on civilised behaviour by Brussels over landing rights, medicine, visas, Euratom, etc. This would still be a deal.
If the EU refused to recognise our legal right to trade on WTO terms, it would be a declaration of economic and political war.
I hope the Chequers deal breaks down since it locks us into the EU’S legal and regulatory regime, on economic terms that are not even appetising. The UK then would most likely have to grasp the nettle of unilateral free trade and tear down all barriers in the initial phase.
This would remove the immediate need to impose any restrictions at the Irish border, leaving Brussels with the invidious choice of either compelling the Irish to raise border barriers on their own territory (a political disaster for the EU) or coming to the table with a new post-brexit plan.
In such a case, prices in Britain would fall, ceteris paribus. There would be no net rise, contrary to what the Governor claimed on the Today programme. We are being taken for fools. Apart from that, Governor, keep up the good work.