Brexit to wipe 99% off UK GDP

The forecasts are out and the headlines are in. Brexit will be an economic catastrophe – worse than the recession we didn’t have after the referendum.

It’s encouraging to see the newspapers talking about the economic cost of government policy.

If only they’d done so on the question of joining the EU in the first place…

Or the Iraq war, Afghanistan, the ERM, selling Britain’s gold, corporate taxes, the minimum wage, tariffs and subsidies, licensing laws, and the Labour Party.

I can understand that financial and economic forecasts are usually dry. But who knew economics could be so much fun, all of a sudden?

“No-Deal Brexit Could Wipe 10.7% Off U.K. Economy Over 15 Years” writes Bloomberg.

“Theresa May’s Brexit plan would result in 4% hit to GDP, says report,” writes the Financial Times.

The Guardian was the funniest:

The deal negotiated by May will probably end up somewhere between the two Chequers-based scenarios outlined, meaning the UK would be between 0.6% and 2.1% worse off in nominal GDP terms in 2035-36 than if it remained in the EU.

Always keen to do a little better than the mainstream media, your editor has come up with this:

Brexit to wipe off 99.332% of UK GDP… over the next 824 years and 4 months.

It sounds stupid and implausible. But it’s not, at least not by the media’s mathematical standards.

The fraud is in the details. It’s a favourite factoid technique of the journos and their accomplices, the economists.

By calculating how much lower GDP growth will be each year under Brexit, the headline writers can write something that looks far more horrific than it really is.

A 10% wipe off of GDP over 15 years is really just a tiny amount of lower economic growth each year. It doesn’t even have to include a recession, necessarily…

Never forget, central bankers are better at causing recessions than predicting them.

Ironically, a recession or two is likely to happen during those 15 years anyway, no matter what. But the economists don’t take that particular eventuality, or reality, into account in their models… There are lots of straight lines in the GDP forecasts making the news today.

The point being, if you look far enough into the future, according to economists, Brexit would crush 99% of UK GDP. That doesn’t mean the economy won’t exist, as the journalists would like you to believe after reading their headlines. It means our economy will be much much smaller than it otherwise would have been. It will grow less, not shrink.

The way the media communicates these figures allows for some wonderful PR management. Economists only have to assume Brexit will be very moderately bad and they still get impressive results – huge chunks of GDP gone missing over very long periods of time.

A small adjustment to the rate of growth delivers all sorts of results over long enough periods of time. Our economy might grow a thousand per cent in coming decades, but as long as it grows slightly less under Brexit, that’s all that matters in the headline.

Defining prosperity

Another irony is that the economists are simply wrong anyway.

How our economy performs in a no-deal scenario depends on what policies the UK government puts in place. Sensible policy could generate more economic growth than EU membership ever did. And the ability to implement sensible policy was the whole point of Brexit in the first place.

Personally, I think the UK government is likely to run the country marginally better than the EU runs itself. So it’s a matter of time until Brexit’s increased UK economic growth makes Brexit an economically wise decision.

The question should be how long it takes us to recover from the initial shock, if there even is one. And that is up to the speed of our reforms – how quickly we can get rid of bad EU laws.

Not that anyone has said a single thing about what sensible policy might actually be for the UK…  You know, the sort of thing governments are supposed to do. Perhaps they’ve forgotten how after so many years in the EU…

Which begs the question, what is the Bank of England and Treasury forecasting? If they’re forecasting government policy to continue as it has been, they’re predicting a future with EU policy, but outside the EU. Even I can agree that’s disastrous.

If the government laid out a pro-growth economic policy going forward under a no-deal scenario – the sort of low regulatory low, tax future that makes the EU quiver in fear – then the economists would be stuck forecasting a prosperous future outside the EU instead.

How embarrassing that would be. It’d show the cost of following EU policy and the benefit of being able to abandon that policy.

But because the EU doesn’t want a Singaporean economic growth miracle on its doorstop, our prime minister has ensured our future is vague enough to be miserable to an economics model.

Who makes Brexit so shocking?

If you take a closer look at the economic modelling used by the media darlings, you begin to notice something. The economic shocks of a no-deal Brexit are entirely down to government policy, not Brexit in and of itself.

The Financial Times explains that “the projected 3.9 per cent hit to the economy would be caused by trade barriers hitting goods and services, with a large component coming from the reduction in migration.”

In other words, if governments don’t implement trade barriers and decide on a sensible immigration policy, there won’t be lost growth. They could even increase growth with good policy.

All the politicians have to do is govern the country and the EU properly. A shocking idea, I know.

But this is the nature of the political game over Brexit. It’s a disaster because the politicians need it to be a disaster. They don’t want Brexit to be successful, so they won’t allow it to be. They’d rather have truck queues on the M25 and flights grounded. As long as nobody realises this would be their responsibility.

The numbers game

There’s another underlying reason today’s GDP stories are so misleading.

To the extent that Brexit was about cutting immigration, it was always going to reduce GDP anyway. Less people means less GDP.

Parading a reduction in GDP after an immigration cut is not a victory for Remainers. It’s common sense – basic arithmetic. Especially over long periods of time.

The relevant question is GDP per capita. Is the typical Briton better off? Good luck finding a headline on that though…

Then again, perhaps it’s not so simple. If the UK targets its immigration at productive people who generate a disproportionate amount of GDP, Brexit’s new immigration policy could increase UK GDP, especially per capita.

That’s how the Australians escaped a recession in 2008. They just stole the world’s productive people by having good immigration policy. On a per capita basis, Australians had a recession. But the amount of immigrants pushed up national GDP.

Then again, the economists are right to doubt the UK government’s ability to pull off a sensible immigration policy in the first place. I just went through the process and it was a pathetic joke of mind-bending proportions. I had to book a hotel I never intended to stay in, and ask them to send me an invoice that was compliant with UK Visas and Immigration bureaucrats’ requirements.

Brexit opportunities go missing

Meanwhile, back in reality, Bloomberg TV is reporting that foreign buyers are soaking up London property at close to record levels. And even the EU buyers are back like before.

The slump I was hoping to benefit from by moving to London during Brexit isn’t materialising. London house prices are trending sideways.

It’d be disappointing if Brexit doesn’t deliver a buying opportunity in the end. For you and me, in stocks and property.

Instead, it looks like I’ve missed my chance to move euros into the UK. Because Europe is looking more frayed than Britain.

The EU’s posterchild of success is pretty much living through the Brexit we’re being warned about. Greece’s banking crisis and bailout needs are back in the news. Only months ago, the EU declared the place “fixed” by EU ideology.

But Greece is a sideshow. A much bigger default is coming. From a country not enamoured by EU ideology.

On Monday, your new editor of Capital & Conflict Boaz Shoshan interviewed me at length about the coming crisis.

The end of the interview reveals how you can get your hands on my new book, for free, with only postage to pay.

But like my time with you at Capital & Conflict, that offer lasts until tomorrow.

So take it up now. And join me at Southbank Investment Daily, my new editorial home.

Until next time,

Nick Hubble
Editor, Capital & Conflict

Category: The End of Europe

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