Why has the UK economy done better than even some Leave supporters expected?
It is important to emphasise that until Britain actually leaves the EU we will not even have a good idea what the economic benefits and costs will be.
Indeed, while we still do not even know yet the terms on which Britain will leave, those on both sides of the argument who claim to be able to assess the benefits and losses which will accrue are just begging to be made to look ridiculous.
There is one area which we are in a position to assess: the shock impact of the vote itself on consumer, investor and trading confidence.
In the hours after the vote billions were wiped off share prices, and the pound plunged.
Because many FTSE100 companies get a significant proportion of their earnings from abroad, the drop in the pound rapidly pushed the stock exchange indexes and stocks and shares in general back up to and even above the pre-vote level.
Of course, we will never know what the pound would have done if there had been a "Remain" vote but it is entirely reasonable to argue that it would have been unlikely to have dropped so sharply, and although the pro-Remain elements of the media have grossly over-egged this particular argument (and thus unfairly discredited it) by blaming certain price increases on Brexit which had little to do with it, I am convinced that the recent blip in inflation which had been hovering around zero and went up to a peak of 3.1% before dropping to 3% in the most recent figures was mostly caused by the rise in import prices due to a lower pound.
I regard myself as a moderate new classical and monetarist economist: those economists who take a strongly monetarist view would probably argue that the extra money injected into the economy by the Bank of England via Quantitative Easing after the vote to prevent a recession may also be partly to blame for the current blip in inflation.
Either way, the Brexit vote is a primary cause of the uptick in inflation and thereby prolonged the stagnation in real wages by about a year.
However, let's get this in proportion here, we're talking about an uptick to 3% inflation which appears to have peaked, and a further year's stagnation in real incomes which have been flat for a decade. This is a significant hit to Britain's pensioners, families and individuals. It is not a trivial matter.
But it isn't an economic catastrophe either.
On issues other than the pound, inflation, and real incomes, the economic shock forecast from lost confidence by some Remain campaigners and many economists - it was even accepted by some pro-Leave economists that there would be a short-term shock - has largely failed to materialise.
The jubilant Brexiteers who have been gleefully pointing out continued growth in the UK economy and in employment are slightly overstating their case, as they are turning a Nelsonian eye to the impact of a lower pound on inflation and on real incomes. But they are entirely correct that in terms of economic growth and employment Britain is doing better than almost everyone expected.
The economy has not significantly slowed down. Employment continues to rise. Productivity continues to flatline, something on which Britain urgently needs to improve, but it hasn't got worse either.
As "The Economist" put it,
"It is true that Britain has slipped down the international league tables of GDP growth since the Brexit vote, but growth in both 2016 and 2017 still averaged around 2%, roughly similar to 2015. Furthermore, house prices are steady and unemployment has dropped to a 42-year low of 4.3%. Disaster has been avoided. What went right?"
The magazine argues in an informative article which you can find here, that
1) The argument that consumer spending would collapse after a "leave vote" was always overstated - the majority of the electorate would have got what they voted for and for the minority the actual exit from the EU was still some way off.
"Meanwhile, Britain remains an attractive place for foreign investors, in part because of its trusted legal system and low rate of corporation tax."
2) "The global economy has also helped. The Brexit vote coincided with the beginning of the first worldwide economic upswing in years. Global trade volumes have grown decently."
"Firms from Seattle to Shanghai have recovered some of their animal spirits and are willing to invest once again. Britain, an economy highly dependent on international trade, has been swept along with everyone else."
3) The positive side of the drop in the pound has been to help exporters, who have been "given an extra boost by the depreciation of sterling, which is almost 10% below its pre-vote level. In the past year real-terms exports have risen by a tenth, though the British trade deficit remains in line with its post-financial-crisis average."
(In the past few days since the Economist published this the pound has risen a bit on the back of good economic figures: the currency is still trading below pre-referendum levels but not as much.)
So that's the position as a consequence of the vote itself. What will happen when we actually leave?
Well, this will depend on whether we can get better trade deals with the rest of the world, and how much access to EU markets we lose. Until we know the outcome of the negotiations and the precise terms of trade, any amount of economic modelling or expertise is hardly more use in predicting economic impacts than consulting a ouija board or throwing knuckle bones.
If Britain winds up with significantly poorer access to EU markets, it is unlikely that we will get enough benefit in the way of better deals with the rest of the world to avoid what the Economist rightly describes as "profoundly negative long-term economic consequences."
However, while there is still a lot of hard negotiating to do, I don't get the impression that the "punish Britain for Brexit" tendency within the EU, though it does exist, is currently as strong as those who have recognised that any deal which punishes Britain would also cause pain to at least some of the other 27 member states - particularly Germany at the time when they are bankrolling everyone else.
A deal we can live with is not by any means in the bag. But I think it can be obtained.
Indeed, while we still do not even know yet the terms on which Britain will leave, those on both sides of the argument who claim to be able to assess the benefits and losses which will accrue are just begging to be made to look ridiculous.
There is one area which we are in a position to assess: the shock impact of the vote itself on consumer, investor and trading confidence.
In the hours after the vote billions were wiped off share prices, and the pound plunged.
Because many FTSE100 companies get a significant proportion of their earnings from abroad, the drop in the pound rapidly pushed the stock exchange indexes and stocks and shares in general back up to and even above the pre-vote level.
Of course, we will never know what the pound would have done if there had been a "Remain" vote but it is entirely reasonable to argue that it would have been unlikely to have dropped so sharply, and although the pro-Remain elements of the media have grossly over-egged this particular argument (and thus unfairly discredited it) by blaming certain price increases on Brexit which had little to do with it, I am convinced that the recent blip in inflation which had been hovering around zero and went up to a peak of 3.1% before dropping to 3% in the most recent figures was mostly caused by the rise in import prices due to a lower pound.
I regard myself as a moderate new classical and monetarist economist: those economists who take a strongly monetarist view would probably argue that the extra money injected into the economy by the Bank of England via Quantitative Easing after the vote to prevent a recession may also be partly to blame for the current blip in inflation.
Either way, the Brexit vote is a primary cause of the uptick in inflation and thereby prolonged the stagnation in real wages by about a year.
However, let's get this in proportion here, we're talking about an uptick to 3% inflation which appears to have peaked, and a further year's stagnation in real incomes which have been flat for a decade. This is a significant hit to Britain's pensioners, families and individuals. It is not a trivial matter.
But it isn't an economic catastrophe either.
On issues other than the pound, inflation, and real incomes, the economic shock forecast from lost confidence by some Remain campaigners and many economists - it was even accepted by some pro-Leave economists that there would be a short-term shock - has largely failed to materialise.
The jubilant Brexiteers who have been gleefully pointing out continued growth in the UK economy and in employment are slightly overstating their case, as they are turning a Nelsonian eye to the impact of a lower pound on inflation and on real incomes. But they are entirely correct that in terms of economic growth and employment Britain is doing better than almost everyone expected.
The economy has not significantly slowed down. Employment continues to rise. Productivity continues to flatline, something on which Britain urgently needs to improve, but it hasn't got worse either.
As "The Economist" put it,
"It is true that Britain has slipped down the international league tables of GDP growth since the Brexit vote, but growth in both 2016 and 2017 still averaged around 2%, roughly similar to 2015. Furthermore, house prices are steady and unemployment has dropped to a 42-year low of 4.3%. Disaster has been avoided. What went right?"
The magazine argues in an informative article which you can find here, that
1) The argument that consumer spending would collapse after a "leave vote" was always overstated - the majority of the electorate would have got what they voted for and for the minority the actual exit from the EU was still some way off.
"Meanwhile, Britain remains an attractive place for foreign investors, in part because of its trusted legal system and low rate of corporation tax."
2) "The global economy has also helped. The Brexit vote coincided with the beginning of the first worldwide economic upswing in years. Global trade volumes have grown decently."
"Firms from Seattle to Shanghai have recovered some of their animal spirits and are willing to invest once again. Britain, an economy highly dependent on international trade, has been swept along with everyone else."
3) The positive side of the drop in the pound has been to help exporters, who have been "given an extra boost by the depreciation of sterling, which is almost 10% below its pre-vote level. In the past year real-terms exports have risen by a tenth, though the British trade deficit remains in line with its post-financial-crisis average."
(In the past few days since the Economist published this the pound has risen a bit on the back of good economic figures: the currency is still trading below pre-referendum levels but not as much.)
So that's the position as a consequence of the vote itself. What will happen when we actually leave?
Well, this will depend on whether we can get better trade deals with the rest of the world, and how much access to EU markets we lose. Until we know the outcome of the negotiations and the precise terms of trade, any amount of economic modelling or expertise is hardly more use in predicting economic impacts than consulting a ouija board or throwing knuckle bones.
If Britain winds up with significantly poorer access to EU markets, it is unlikely that we will get enough benefit in the way of better deals with the rest of the world to avoid what the Economist rightly describes as "profoundly negative long-term economic consequences."
However, while there is still a lot of hard negotiating to do, I don't get the impression that the "punish Britain for Brexit" tendency within the EU, though it does exist, is currently as strong as those who have recognised that any deal which punishes Britain would also cause pain to at least some of the other 27 member states - particularly Germany at the time when they are bankrolling everyone else.
A deal we can live with is not by any means in the bag. But I think it can be obtained.
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