JEREMY PEAT
As a wholly unrepentant remainer – or remoaner if you prefer either will do – I should perhaps be pleased that further Brexit delay has been agreed, as this appears to enhance the likelihood of a further referendum or alternatively a much ‘softer’ exit.
However, this further, extended, delay adds to a major concern regarding the effect on the UK and Scottish economies. The uncertainties are accentuated and their duration is markedly extended. This will result in ultra-low business investment and innovation, implying zero or negative productivity growth, for many months to come. This in turn not only damages any sign of momentum in the economy but also lowers the productive potential for many years to come. Low investment and zero productivity growth for a couple of years will damage our economy for years rather than just months.
Whatever the decision re Brexit, there will be no quick recovery. Slow growth is with us for some years. The debate on a second Scottish referendum can only add to the uncertainties with risk of a similar impact on anticipate long-term gain but be sure, given the uncertainties, that there will be medium term pain.
The impact of the uncertainties is already clear. UK GDP grew last year by a mere 1.4%, the lowest rate since 2012. The Bank of England’s forecast for 2019 is for more of the same. This is to be compared with the estimated ‘trend’ rate of 2.5%. That is the growth rate that the UK could achieve on a sustained basis without undue inflation pressures. One upside is that there appears little risk of any increase in interest rates in the foreseeable future!
The UK data for the first couple of months of 2019 look a little more encouraging but come with at least four caveats. First, early release data are always subject to the risk of significant revision. Second, they follow data showing a contraction across all key sectors in December last year. Third, relatively strong data are inconsistent with the findings of all key surveys - PMI, CBI, FSB, etc. – which point to stagnation rather than expansion. Fourth, the data will have been skewed upwards as a result of many businesses – and public sector organisations – stockpiling goods to minimise the risks of ‘no deal’. In due course stocks will be run down again.
There is no doubt about the weakness of investment, at either the UK or Scotland level. Taking the data for the last four available quarters, UK investment is down 3.7%, having declined in each quarter. That is a most disconcerting performance, which, on the basis of all survey evidence, will almost certainly be shown to be matched in Scotland when equivalent data are available.
None of this can be surprising. Businesses exposed to external markets and/or external competition will have been focussed on stockpiling key materials which may be in scarce supply for a fair period in the event of (e.g.) a no-deal Brexit. While many of their key markets are at risk they will certainly not be interested in building up capacity or investing scarce resources in more efficient means of production.
Now decision-time has been deferred – again – and the uncertainties are everywhere. There could be another referendum and even a switch to ‘remain’. There could be a general election, potentially ushering in a new Labour Government with policies unlike those seen in the UK for several decades. There could be a new and very different Prime Minister even with no change in the main party of Government. There could be another Scottish referendum before then end of 2020.
As discussed in previous columns, the one apparent light in the economic gloom has been strong employment and record low unemployment. But all is not as it seems at first blush. The quality of jobs has been steadily eroded, along with average real (inflation-adjusted) pay. Looking at UK real average weekly pay there has been a fall from £525 in February 2008 when the ‘great recession’ struck to £494 eleven years later. That is a decline of nearly 6%. For many times are really tough. The Fraser Institute tells us that over 50% of those in poverty now live in a household where there is at least one working adult. ‘Inclusive growth’ is yet to be achieved.
Looking forward we know that economic life is not going to get any easier. The Brexit effect is still largely unknown but highly likely to be unwelcome. Demographic change is happening at pace, with an increasingly aged population and rising dependency ratio – i.e. a declining percentage of people generating income and wealth. The climate change campaigners have evidence on their side, but the required changes to transport, housing and offices and electricity/gas production will prove extremely expensive.
The solution is clear but hard to attain. We really need more and better skills, more investment, more innovation and much accelerated productivity growth. This would permit higher real wages and increased funds for the necessary public sector investment. One eminent economist has suggested that UK economic growth in the 2020s could be the weakest since the Second World War; so much to achieve with so limited resources and no Secret Santa to hand. That Dad’s Army character kept on saying ‘Don’t Panic’. A good panic now from Governments to focus on what really matters might not be a bad idea!
Jeremy Peat is visiting professor at the University of Strathclyde.
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