Did the experts get it wrong on Brexit?
Most economists are so personally committed to staying in the EU that they forecast disaster if we leave
Ever since the UK voted to leave the EU, economists have been busily downgrading their forecasts of growth for the year ahead. No one was expecting a fantastic year to start with, but now the consensus is for a recession in the region of 1% of GDP. Goldman Sachs, for example, expects a contraction of up to 1.8% of GDP. Barclays expects negative growth in the third and fourth quarters of this year. Credit Suisse is forecasting a contraction in the region of 1%.
But the reality is that standard economic models for forecasting output are useless in a situation as volatile as this one. Those predictions are just as likely to be wrong as right. In fact, the case for arguing that Brexit will lead to a recession is very weak. There will be some impact on trade, of course, and that could certainly tip us into recession. But we haven’t left the EU yet – we haven’t even started the process by passing Article 50, which triggers the formal process of withdrawal. So it doesn’t make any sense to include that in the calculations. Nor will there be any fiscal tightening or a tightening of monetary policy. By contrast, the government seems intent on relaxing the budget limits, and the Bank of England has committed itself tokeeping interest rates low for even longer than it already planned to. So there is no reason to think that will damage growth. The main argument for forecasting a recession is that there will be a direct hit to confidence and hence to investment – that “animal spirits” will be dampened, and some new companies will put expansion plans on hold.
Well, perhaps. But that ignores that factors such as “confidence” are difficult to measure, and economists have a poor record of predicting them. It also ignores the impact of the huge devaluation of sterling that followed the vote and any investment boost from increased government spending on infrastructure. So, overall, the case for forecasting a recession looks pretty threadbare. We may well see some damage to our exports, but that won’t happen until 2019 at the earliest, if at all, while the positive impact from a lower exchange rate and higher government spending willcome through right away. On balance, it might seem more logical to forecast a modest upturn in growth. It may be true that leaving the EU does long-term damage to our competitiveness, but a country can do that and still be fine in the short term. Fairly few even seem willing to take on board the fact that under World Trade Organisation rules the worst that can happen is that the EU imposes tariffs of around 4%, which, since the currency has just devalued by 8%, hardly matters. Exports can simply absorb that in healthier margins.
Even Nobel-prize-winning economist Paul Krugman, who thinks we should have Remained, is starting to argue that most economists are letting their own biases affect their work. Writing on his New York Times blog, Krugman noted that although he might personally sympathise with their position, he was “worried that the apparent consensus among economists was in some sense political rather than analytical”. In other words, the majority of economists, especially in the City and the universities, are so personally committed to staying in the EU, they have been driven to forecast disaster outside it, even if there was little real argument for doing so. If so, that’s surely a mistake. Economics is not physics, but it is meant to be more rigorous than that. Professionals should be capable of making an impassioned assessment based on the facts, rather than dressing up their own opinions as forecasts. If they can’t, people will quite rightly start to wonder what they are there for.