Bill Jamieson: Grim forecasts after Brexit don’t ring true
Hard hats at the ready: the Fraser of Allander Institute has come up with post-Brexit forecasts so gloomy that by the end of them you may well have lost the will to live. It predicts Scotland could lose between 30,000 and 80,000 jobs as a result of Brexit. The scenarios range from an “optimistic” model similar to Norway’s relationship with the EU, to a “pessimistic” one based on a so-called “hard” Brexit outside the single market and based on World Trade Organisation rules.
The most optimistic outlook would see Scottish GDP drop by2 per cent within ten years, causing the loss of 30,000 jobs. The most pessimistic model would see GDP 5 per cent lower within a decade, with 80,000 fewer jobs in the economy.
But by a strange paradox, Scotland would not, as previous forecasts may have indicated, suffer more than the rest of the UK. “Throughout all scenarios,” it notes, “the estimated negative impact of Brexit on the rest of the UK is greater than it is on Scotland, in terms of GDP, employment and other measures.”
However, lest there was any doubt on the future that awaits us, Professor Graeme Roy, FoA’s director, says the “detailed assessment” had found Brexit was likely to have “a significant negative impact on the Scottish economy”.
Now many questions are begged by this study, commissioned as it was by the SNP-dominated Scottish Parliament European and External Relations Committee.
One is how confident we can be of forecasts stretching ten years ahead. Public confidence in forecasting over any period has been shaken by the failure of the economy to conform to the gloomy forebodings ahead of the Brexit vote. Services, manufacturing and construction have all picked up in recent months. Employment has continued to rise. Even the FoA has a noted track record of amending its growth forecasts often within months of their publication.
Another is how useful it is to base post Brexit analysis on two fixed scenarios – Norway and “hard” Brexit – when negotiations have yet to begin on the arrangements the UK will ultimately reach. The EU already has no fewer than 42 different trade agreements and tariff accommodations with non-EU countries. There is every likelihood the UK will arrive at neither a fixed Norway nor “hard” Brexit model but a hybrid somewhere in between.
The study looks at Scottish trade relationships with the EU and also Scotland’s trade relationships with the UK. But, as the FoA admits: “Clearly these scenarios are simplifications of any post-Brexit deal the UK will actually secure. Indeed, there is no single arrangement that can be taken off-the-shelf and applied immediately. The aim of these scenarios is, however, to provide an illustration of the direction and scale of possible impacts.”
Related questions surround how the study has dealt with the many other uncertainties that lie ahead. There are uncertainties whose existence we know – currency fluctuations, the fluctuating pace of world trade, government tax and industry support policies.
Now economics is a behavioural science. It stands or falls by its capacity to analyse the likely behavioural response to change of firms and households, customers and investors. But the FoA study assumes a wholly unrealistic “no change” or stasis.
Then there are those risks that we don’t know. The UK is one of the most open economies in the world. It has constantly to adapt to changes in geo-politics, technology and innovation – and many of these by their nature are impossible to predict – and thus the behavioural response of firms and households to changes in the external environment.
The question here is whether the impact of unmeasurable risks outweighs the impact of the measurable ones. Standing as we do before talks have even begun and when the political dynamics within many EU states is also changing, there is every likelihood this will prove the case.
Questions also arise on how much original analysis the FoA has done to reach its conclusions. Much of the study rests on Scottish figures derived from a National Statistics publication providing estimates of Scotland’s international exports and exports to the rest of the UK.
But as a footnote candidly admits: “There remain ongoing questions around the quality and completeness of export data for Scotland… The need for greater coverage of Scottish trade should be an urgent priority for both the Scottish and UK governments”.
The study uses estimates of the impact on UK exports under three stylised scenarios identified by the National Institute for Economic and Social Research (NIESR). These were based on research into the links between alternative trading relationships and volumes of economic activity made in 2006 and 2008. The NIESR analysis saw almost no increase in long term unemployment (0.2 per cent), although wages do fall by between two and six per cent by 2030.
On this dusty foundation FoA has constructed summations of its own. “Somehow,” notes economist John McLaren, “it manages to conjure up a fall in employment of 1.2 to 3.2 per cent – which with a rising population means an even bigger increase in unemployment – plus a fall in wages of 3 to 7 per cent by 2026.”
So there we have it: doom if Brexit is “hard” and mere catastrophe if we end up in an arrangement like Norway or Switzerland. But why waste effort questioning the shaky foundations of such an edifice? The report has worked to confirm the eager forebodings of the body which commissioned it. The Europe committee convener Joan McAlpine has pronounced the outlook as “grim”, and warned there could be a “huge constitutional crisis” if Holyrood is not consulted about the Westminster Bill to repeal the 1972 European Communities Act. “Our committee,” the SNP MSP added, “has already found that maintaining access to the single market is key for business and industry in Scotland. If the UK government leads us into a “hard” Brexit, the evidence presented in this report indicates that there could be disastrous consequences for jobs, exports and production.”
But if the rest of the UK is forecast by this study to suffer more, how much responsibility for Scotland’s poor economic performance can then be laid at the door of Brexit?