Strategy & economics
Take the first number you thought of...
2016 has not been a good year for economists trying to delineate the fortunes of the UK economy. 2017 could be worse. It is worth reviewing what was being predicted at various stages of the year. In January, according to the Treasury’s monthly survey of forecasts, City economists were predicting growth of 2.1%. As it turns out, this was a pretty good projection, since it now looks as if the economic activity will have increased by exactly that percentage (although the ONS will almost certainly come to revise the data at a later date). Unfortunately, economists could not restrain themselves from fiddling with their numbers, particularly in the wake of the referendum. Although, even by June, forecasts had become a little more cautious, with anticipated growth for the year reduced to 1.8%, the referendum result sent City soothsayers – and their numbers – into a tailspin. Growth estimates for 2016 were cut to 1.5% (a more appreciable adjustment than it might seem given that we were already almost half way through the year). At the same time, during the two months following the referendum, growth forecasts for 2017 were hammered, falling from 2.1% to just 0.3%.
This was not a glorious moment for the economics profession. The view being promulgated was that the economy would come to an almost immediate grinding halt following the electorate’s modest majority decision that the UK’s fortunes might not be best pursued by staying in the EU. Indeed, an increase in GDP of 0.3% for 2017 as a whole would have to have been based on falling economic activity in at least two quarters – implying, in all likelihood, that the UK would fall into recession during the year. Since this nadir, and with the benefit of a continuing flow of reasonably positive information, forecasts have been pushed higher and currently stand at 1.0%. In my view, however, they are still too low.
The knee jerk response of the Bank of England to the referendum result was to cut the bank rate to 0.25% and to resume quantitative easing. Interestingly, most commentators seemed to question the validity of these moves; my conclusion was that, even if you did regard downside risks to the economy as being severe, taking monetary policy deeper into unconventional territory could well prove counter-productive. I have discussed in previous columns why I believe that exceptionally low short- and longer-term interest rates induce economic lethargy, and I think that is becoming ever more apparent, not just in the UK, but in other countries that have followed this policy route. Indeed, I now sense a growing realisation (and not before time) that unconventional monetary policy, if ever it was anything more than momentarily successful, has now reached the end of the road.
Back to the real economy, June 23rd did not rock the foundations of the economy. That is not to say that we will not experience a few tremors in the future. But it is evident that households have not curtailed their spending in the face of Brexit uncertainty. It is also evident that companies, while saying that they feared the worst, have not acted as if they were travelling full tilt towards economic Armageddon. Most obviously, household spending has remained on a firmly upward trend. In fact, in more normal times, were the Bank of England to be debating the implications of year-on-year growth in retail sales volumes of over 8% and an expansion in consumer credit of more that 10%, it might have concluded that it was time for a modest tightening in monetary policy (an ever-tightening labour market would also suggest that this policy route was appropriate). But central banks, at least those on this side of the Atlantic, remain convinced that we remain in highly abnormal times and that the merest hint of monetary aggression might cause immediate recession. I remain of the view that central banks are part of the problem – that they are actively hindering a return to normality.
Meanwhile, although key areas of business investment remain very lacklustre, weaker trends were in place well before the referendum. In fact, while it might be supposed that uncertainty over the course that Brexit might take will undermine investment spending, there has been considerable anecdotal evidence suggesting the contrary. In part, this may be due to the depreciation in sterling, which has made the UK considerably more competitive. However, I strongly suspect that it is the UK’s better economic momentum and overall vibrancy that have continued to attract the attention of overseas investors.
Of course, the UK is facing a greater degree of uncertainty. But the challenge to UK-based companies from that uncertainty may induce exactly the opposite response to the one widely expected. Rather than encourage them to do nothing, I believe that companies will be provoked into taking positive action to prevent Brexit ambiguities from undermining their longer-term growth prospects.
Richard Jeffrey was Chief Economist at Cazenove Capital until he retired in January 2018.
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