Wednesday 21 September 2016

Reading today's OECD statement

Considerable caution is needed when dealing with both economic forecasts and media reporting. When the two are combined, it becomes positively hazardous as with today’s OECD statement on the impact of Brexit. Read the Independent and you learn that “OECD halves growth forecast due to EU Referendum vote”, but the Guardian’s pro-Brexit economics editor Larry Elliot reports that the OECD has “backtracked on its warning that the UK would suffer instant damage” from the vote. The pro-Brexit Telegraph takes the same line, but headlines it under the rather cautious formulation “Brexit not as bad as feared”. Of course, all three reports are in some sense true. The first report highlights the OECD cutting its prediction of UK growth in 2017 from 2% to 1%; the second and third increasing its prediction of UK growth for 2016 from 1.7% to 1.8%.

In any case, there isn’t any point at all in trying to read the economic effects of Brexit yet. Brexiters are keen to insist that what they call ‘Project Fear’ has been discredited because there has been no immediate recession as predicted by, especially, the Treasury. However that is meaningless because all of those predictions were predicated on the understanding that Article 50 would be triggered immediately after a vote to leave, as the then Prime Minister had said would be the case. The Treasury report on the immediate impact of a leave vote is explicit in stating this (paragraph 1.6 on p.12 and paragraph 1. 38 on p.24 of the link).

This didn’t happen – one of the few sensible decisions that Cameron made in this whole saga – and as a result the situation is in limbo. That doesn’t justify any celebration from Brexiters, as there are plenty of negative impacts already and not a single indicator that has shown a positive reaction to Brexit (the fall in sterling may be a positive for exporters, but it wasn’t a positive reaction to Brexit, and of course any positive for exporters is a negative for importers). If they were right about the new opportunities opened up by leaving, you might expect just one such reaction and if the best that can be said is ‘not so bad as feared’ it is hardly a ringing endorsement! Moreover, within that limbo, at least part of the reason why the economy has held up has been the very strong monetary intervention of the Bank of England - for which savers and future pensioners will pay a heavy price. 

The short-term predictions cannot therefore be evaluated until Article 50 is triggered, and crucial to the reactions to that will be whether by then it is clear that the government will seek soft Brexit and that the EU are likely to agree to that. If that is not the case (or even if, before Article 50, it becomes clear that it will not be the case) then we will see immediate and negative economic effects. Even so, it will be a long time before the full economic consequences of whatever version of Brexit emerges will be known.

The economic consequences of Brexit are anyway only part of what matters. Less easily quantifiable, and already starting, are the political and what might be called reputational effects. The status of Britain in the world, and its influence in shaping key debates and policies has undoubtedly been diminished. The former US Secretary of State Dean Acheson famously said in 1962 that “Great Britain has lost an empire and has not yet found a role”. In recent years that role had become that of the fulcrum between the US and the EU, and the peaceful post-communist transformation of eastern Europe was perhaps its greatest achievement. Whatever form Brexit takes in terms of trade arrangements that political role has now disappeared for good.

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