Sean Rickard - Independent Economic Analysis

One should feel sorry for Philip Hammond.   I suspect he was one of many who saw the irony when, in introducing his Budget, he announced ‘We are at a turning point in our history.’   Just when he needed a budget to convince voters, weary of austerity, that better times lay ahead he was forced to concede that living standards are going to go on getting worse.   As is now the norm, he started by outlining the OBR’s forecast for the economy.   In contrast to its usual optimism the OBR was forced to admit that the UK’s future was not as bright as it had previously forecast.   Per capita GDP is likely to be a cumulatively 2 per cent lower in 2021 than it had forecast in March.   The OBR’s GDP growth forecasts for the next four years are 1.5, 1.4, 1.3, and 1.3 per cent respectively.   No post war chancellor has ever had to report such a dreadful growth forecast.  


A direct consequence of the OBR’s forecast is a prolonged period low wage growth.   The IFS estimates that average earnings will be some £1,400 lower than previously predicted by 2021.   The Resolution Foundation has concluded that British households are set to suffer their longest sustained period of falling living standards since records began in the 1950s.   A by-product of lacklustre wages growth is lower tax receipts and hence higher government borrowing.   Official estimates show that over the life of this parliament some £90bn will be added to the UK’s debt and Hammond’s target of balancing the government’s revenue and expenditure has been pushed into a distant future.  


The main reason for the OBR’s dramatic downgrade should come as no surprise to readers of this blog.   After fourteen forecasts, over seven years, wishfully predicting that labour productivity would return rapidly to its pre-financial crash rate of growth the OBR has acknowledge reality.   Productivity has hardly grown since 2008 with the effect that output per head is now about 17 per cent lower than it would have been if the pre-crash trend had continued.   But, even now the OBR can’t accept that the most likely path for productivity growth is that it will continue to flat-line.   For no good reason the OBR has assumed productivity growth will recover but at a slower rate.  


The reasons for the slowdown in the UK’s rate of productivity growth are not be fully understood but there is widespread agreement that the relatively low levels of business and infrastructural investment are a major influence.   As explained in my previous blog, following the financial crash banks focused on re-building capital reserves while the government’s policy of austerity depressed expenditure on the country’s crumbling infrastructure.   But now business investment is being hit by Brexit uncertainty.   For the Budget, Brexit was the elephant in the room.   Mr Hammond referred to it only once to announce the setting aside of £3bn in case the negotiations fail.  


The chancellor’s silence serves to demonstrate how Brexit has poisoned Parliamentary debate and elevated government deception.   The reality is that the outlook is likely to be a lot worse than predicted by a generally panglossian OBR.   Its forecast had assumed the Brexit negotiations would go smoothly.   But even if they do to what outcome?   Theresa May’s fantasy, as set out in Florence, is unachievable.   Even though the probability of a chaotic ‘no-deal’ has now shrunk the uncertainty created by Brexit will persist for many years.   Put simply, Brexit is the reason the economy is likely to grow even more slowly than envisaged by the OBR.


Had the chancellor chosen to be honest he would have pointed out that since the referendum forecasts of economic growth have been consistently revised down.   In addition to the negative effects of Brexit on business investment it has also resulted in net migration falling by106,000 over the past year - the largest fall since records began - with EU nationals accounting for three-quarters of the decline.   This ‘Brexodus’ may be a matter of satisfaction for many but the wise will be aware that it has largely been net migration that has enabled the economy to grow at a faster rate that productivity.   He could have gone further and pointed out that the UK, having been the fastest-growing G7 economy on the eve of the referendum, has now fallen to the slowest growing.  


Continuing with the Brexit debacle will consign the UK to a country characterised by low productivity growth, low wage growth, a persistent trade deficit and above average inflation, generated by a weak currency and uncertain prospects.   Anyone of sound mind faced with this scenario would change tack, but not the zealots.   Their response would be a ‘no-deal’ Brexit affording the opportunity to offset the adverse effects of inflation by reducing WTO tariffs to zero.   Most zealots still cling to the delusion – despite all the evidence to the contrary – that the UK’s under invested, unproductive businesses would be strong enough to benefit from the UK’s newfound freedom to conclude free trade deals with whomever.   But, as pointed out recently by the Bank of England’s chief economist, the UK’s industrial sector has only a small number of highly productive companies and a long tail of unproductive ‘zombie’ firms unable to withstand the cold winds of unfettered international competition.


Sadly, far from there being a Brexit bonanza, the country now faces the prospect of being one of Europe’s worst performing economies.   I am not alone in this view.   The arch Leaver John Redwood – who as recently as the 15th October wrote in the Sun urging Theresa May to leave with no deal – has tacitly admitted, as Brexit hoves into view, that the future is not looking so bright.   In an article published in the FT on 3rd November, he urged investors to put their money in countries that are likely grow faster than the UK in the future.   One area where Mr Redwood thinks investors should be putting their money is the euro area!  


T H E  E L E P H A N T  I N  T H E  R O O M

27th October 2017


Sean Rickard Ltd