Brexit: Economic Mythmaking

The UK is likely headed for a mild recession. Mild in terms of GDP but sadly not in terms of unemployment and the human tragedy.

There is a myth being developed that this is down to the Brexit vote or even due to the uncertainty caused by there even being a Brexit vote.

Growth Rates (%) 1960-2014

GrowthRates

Source: World Bank

The average length of an economic expansion in the UK since 1960 is 9.8 years, including the current period. Assuming, as seems likely, GDP expands by a marginal amount over 2016 falling into recession from Q3 onwards the current expansion will have lasted for seven years. Hardly an extraordinary departure from the average over the past 50+ years. The average length of a period of economic growth in the USĀ and EU over the same time periods has been 7.8 and 10 years respectively. There is a cycle to economic expansions as with most other things and to pretend that any contraction in the UK is completely out of character is ridiculous.

OK – of course, there could be a connection to the Brexit vote and to the economic cycle right? Yes.

However, PMI Surveys for the services, manufacturing and construction have all been trending down since Q12016 or earlier. The heat has been going out of the UK economy since the early parts of the year. Employment growth has been similarly slowing since the start of the year (though here it can be at least partially attributed to marginal gains being hard to come by when near full employment.

The National Living Wage came into effect from the beginning of April and was predicted to lead to higher unemployment, accepted as a consequence of increasing pay for the lowest paid. So any upticks in unemployment in the coming months can be attributed more to the NLW than to Brexit.

 

The UK was more than likely due a mild recession. It is likely that the severity of the recession will be increased by the uncertainty around what Brexit means. But the idea that any recession is due to our decision to leave the EU is ridiculous.

 

 

The chancellor has suggested a cut in corporation tax by 5% taking the UK down to 15% by 2020 instead of 17% by 2020. Naturally, I’m all in favour of this but can’t help thinking the economy would be better served by taking a penny off employer’s NICs. Corporation tax cuts have been more than self-funding over the last parliament so maybe even better would be to do both.

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