End agonising delays and let positive sentiment drive economic growth
Sentiment is an important economic factor. Whether or not markets, services and industry feel optimism or caution, exuberance or despair, is a huge driver of circumstance and prospects. The latest Brexit delay, this one until – appropriately enough – Hallowe’en, will certainly be enough to give business owners and investors the jitters. Those who purport to put their
faith in economic forecasts ought to pay more attention to this.
A modern G7 economy is a complicated thing, difficult to predict. You may have noticed how frequently economic forecasting is inaccurate, despite all the data collected and modelled. Economists are paid most attention to by those on the periphery of business – the media and politicians, for instance – rather than those who are its practitioners, and I’m yet to meet a chief executive who pays more attention to an economic forecast than to what can be seen happening in the sales department.
According to forecasts given out by the Treasury during the Brexit referendum we should be in recession by now. That did not happen. The Bank of England is now predicting that GDP would be 9.3 per cent lower after 15 years if a no-deal Brexit were to accidentally transpire – and 2.3 per cent lower if the Prime Minister’s plan is adopted. I have doubts as to whether that would be accurate.
One of the Bank of England’s assumptions is that no-deal would trigger a rise in negative sentiment in the UK economy – at home and from abroad – leading to lower growth. But it is impossible to know with certainty whether the naysayers will be proved right or if, instead, optimism will surge as the government backs free-trade deals and deregulation.
I do know, though, that Brexit has sentiment about our economic prospects in a suspended prelude. Talk has been downbeat for two years and the Commons impasse is intolerably tiresome. Business is pausing before making investment decisions, and it is now affecting everybody from the small manufacturer hesitating about capital spend to the large asset manager attempting to attract foreign funds. A six-month extension is only an elongation of this agony.
Brexit is inevitable at some point. As the EU’S share of the global economy continues to decline, we will eventually realise that we should pivot ourselves to growth areas, especially Asia. As the EU continues to respond to each of its economic and social problems with further integration – and regulation – it will become an increasingly inflexible institution. At some point, that inflexibility will break it. The other inevitability is that Ireland will, over the next generation, be drawn away from the EU and back to the UK as we remain its largest trading partner and with a land border. Scottish nationalists should take note.
Were the Prime Minister’s plan, or some other version of a soft Brexit, to pass, then I predict that the economy (barring a systemic credit shock comparable with 2009) would assume growth on an almost identical trajectory to that if we remained in the EU. Should we exit with no-deal then I predict one or two quarters of lower growth – but growth nonetheless – and then over the medium to longer term, sharply higher growth. Why? Positive sentiment as a result of increasing trade and tariff reform. And my unscientific predictions are as good as an economist’s forecast and, at best, wiser.
Business investment drives national prosperity and is driven more by confidence than dry economic forecasting. The posturing politicians keeping us stuck at this stage of the Brexit process will push us into recession if they do not reach some sort of agreement soon.