The official forecasts – wrong and damaging.
The official forecasts and Ministerial statements have been loaded with gloom ever since we voted to leave the EU in June 2016. There seemed to be palpable disappointment in the financial corridors of power that the short term dire forecasts the government and Bank put out before the vote did not come true. The Bank tried to claim some credit for preventing disaster because it cut rates and printed more money for no obviously good reason a month and a half after the vote. It left a long enough gap to see if a bad confidence effect hit the economy as they had said it would, and only belatedly took monetary action. There was no evidence of a recession about to hit before they announced a new Quantitative easing programme on August 4th. Consumers remained confident, and the small group of large anti Brexit companies who started grumpy had to respond more positively when they saw the demand still coming through.
The official forecast of a big loss of jobs was wrong, with good continued rates of additional job creation. They forecast a recession for the winter of 2016-17, only to see continued good growth. The second half of 2016 saw expansion at 0.6% in both the third and fourth quarters of the year. There was no obvious wobble after the vote, with these figures strong by both recent UK and advanced country performance since the banking crash of 2008-9. Consumer confidence remained high. The dip in business surveys immediately after the vote soon corrected as spending held up well.
They were wrong about house prices and housebuilding. Housebuilding continued to expand, and house prices rose a bit more despite the money squeeze on mortgages and the tax increases on transactions with higher Stamp duties. The only forecast they claim to have got right was a fall in the pound. The pound was around $1.43 prior to the vote. It fell to $1.29 thereafter, and fell further with the loose money policy to a low of $1.21. It reclaimed all the loss by April 2018, only to relapse a bit again at a time of general dollar strength against all main currencies. There is a much more pronounced effect on currencies from higher dollar interest rates and dollar strength than a Brexit effect, with sterling both falling and rising after the vote.
UK economic policy – wrong turning?
The action to slow the UK economy began under George Osborne. He decided to target the housing market. He placed high new transaction taxes on buy to let properties, second homes and dearer residences. He worked with the Bank to squeeze the mortgage availability in some sections of the market. This had the predictable effect of pushing the volume of buy to let investment down sharply, and created some top end weakness in residential property. A further increase in tax on rich foreigners living in the UK also took more out of the top end homes market, especially in London. As Chancellor he continued with a substantial fiscal squeeze. This was mainly administered by large increases in tax revenue, with substantial increases in certain tax rates. Where he did cut the rates, as with corporation tax, more revenue came in from taxation.
The wish to slow the economy more was taken up by the new Chancellor, Philip Hammond, who continued with the twin policy of monetary squeeze and fiscal squeeze. The Bank of England from the spring of 2017 announced restrictions on certain types of mortgage lending, car loans and consumer credit. At the same time the Chancellor sought a further big reduction in the budget deficit and proceeded to overshoot his target for getting the deficit down. He increased car taxation considerably, with big rises in Vehicle Excise Duty. This change fell particularly hard on dearer diesel cars, many of which were made in the UK. The Environment Secretary backed this up with regulations and threats of regulations against diesel and petrol cars. Sales of diesel cars fell by a quarter as a result of these policies. The public did not immediately fall in love with electric cars to take up the slack. The UK’s car investment policy until recently had been based on making the UK a centre for clean modern diesel engines and for dearer vehicles with these engines. The abrupt change of approach targeted harmful policies for the successes of the industrial strategy up to that point.
The energy imperative – missed opportunities
The UK economy has been going through a wider structural change. The offshore oilfields are growing old and producing less and less oil. The government did not wish to follow a US style policy of tapping into new sources of hydrocarbon in the shales as it had environmental and planning concerns. One of our most productive sectors gradually contracted. There was no big response to remove taxes and improve incentives to keep existing fields going for longer with additional investment. The absence of new sources of lower priced gas militated against the UK keeping or rebuilding its petro-chemical industry, allowing this to pass to the continent and to the USA.
The UK turned to the idea of dearer and scarcer energy. It closed down coal power stations and preferred renewables to new gas fuelled stations. The country’s margin of spare capacity reduced, as the decision was made to rely more on variable power supply to business in times of high demand. If you wish to promote industrial expansion, plentiful supplies of cheap energy are an important necessity. As the US put in more and more cheap gas facilities, as China relied on plenty of fossil fuel generators and as Germany continued with dirty lignite produced power, the UK chose to import more things from these places rather than making them at home. The UK has an excellent record of cutting carbon dioxide emissions from business and power generation. The price of this includes a large balance of payments deficit in goods, as we import many of the items that need large quantities of power to make.
The UK economy – a bigger picture
The UK economy, despite the wrong turnings and missed opportunities, is fundamentally strong.
The commercial property market reflects the buoyancy. It has performed well since the vote despite the pessimistic advice and forecasts. With the exception of some retail shop properties, where rapid structural change with a shift to online is hurting rents and values in some High Streets, tenant demand for commercial property is good and values have risen. The UK has been a magnet for technology investment from majors like Apple and Amazon downwards in the size scale. Warehouses have been well bid as people put in the infrastructure for on line delivery, and offices are in demand where caution by developers points to a potential shortage soon.
Looking ahead there will be gains from leaving the EU and opportunities – to rebuild industries, to reduce taxation, to check and reverse the costly and unnecessary regulatory burdens imposed by Brussels.
One industry poised for change is fishing. The UK watched as successive rounds of quota regulations have reduced our capacity to catch our own fish from UK waters and sell them to ourselves. Instead the UK has seen more and more of its fish landed by foreign vessels, and has come to depend on imports to keep fish on our menus. There is still no resolution to ensure early repatriation of our fish under a policy that will land more and eat more at home of what is caught in UK waters.
The same opportunities exist elsewhere.
There is great scope to grow more of our own food. Our flower market has been taken over by the Dutch, our supermarkets have many vegetable lines we could grow at home and we could produce more of our own pork and beef. This would also cut food miles and increase the scope for food processing activities here as well. For years we were kept deliberately short of milk quota, forcing us to import value added milk products like yoghurt and cheese. Freed of EU restrictions we should be able to produce more of our own milk and increase output from our excellent local cheese businesses. If we changed our energy policy we could rebuild more of our chemical industry.
The big picture is bright. The UK economy has done well despite the policy makers. The combined money and fiscal squeeze has been large, but the economy keeps growing, led by a large number of new jobs over the last two and three quarter years. The car industry has been badly damaged by world trends and UK policy. Some large businesses have put off new investment, yet the overall result is a better performance than Italy or Germany in recent quarters. Just think how well we could do if we set taxes and regulations that helped investment in cars, energy and housing. And think of the better prospects once we have left the EU and are free to make our own choices on tax, spending and trade worldwide.