The Economy – After BREXIT


On 23rd June, the UK electorate voted to ‘leave’ the EU (BREXIT). The immediate economic consequence was a collapse in Sterling, making exports cheaper and imports dearer. Over time, this might help growth and add to inflation. However, the referendum result increased uncertainty about the economic outlook and may reduce net new investment, output and jobs in the months ahead and beyond.

More firms and investors now seem less confident about the outlook for growth. The survey evidence and the forecast consensus has shifted downwards, acknowledging that there is some risk of negative real GDP growth, higher inflation and lower employment.

In addition, upheaval within the leading UK political parties, the lack of terms/a plan to smooth the UK approach to BREXIT, and concerns over the forthcoming presidential election in the United States all encourage a ‘wait and see’ attitude amongst key businesses.

With forward indicators weakening, the economy is still constrained by fundamental weaknesses: low productivity growth and competitiveness (as shown by persistently large trade deficits). For the foreseeable future, uncertainty over BREXIT will not improve these factors.

Latest evidence

  Annual Quarterly Monthly
Real GDP (%ch, yoy) +2.2 (2015) +2.2 (Q2) n.a.
CPI inflation (%ch, yoy) 0.0 (2015) +0.4 (Q2) +0.5 (Jun)
LFS unemployment (%) 5.4 (2015) 5.1 (Q1) 4.9 (Mar-May)
Trade deficit* (£bn) -36.6 (2015) -12.4 (Q1) -2.3 (May)
Base rate (%) 0.5  (2015) 0.5  (Q2) 0.5  (Jul)

Source: ONS   * goods and services

Growth in the UK economy was fairly modest and flat through the first half of 2016. Despite global/national political and economic uncertainty, as the table above indicates, real growth was maintained close to trend (just over 2% year-on-year), inflation remained well below the 2% per annum policy target (though it edged a little higher) and the drop in unemployment may have started to flatten out (at about 5%). The net trade deficit was still enormous and the loose money and austere fiscal policy stance was largely unchanged. Productivity growth remains too low for sustained and sustainable UK growth.

If real GDP growth now slips below 2% per annum, employment growth will ease or reverse and little or no improvement in productivity can be envisaged. Meanwhile, the recent (roughly 9%) drop in Sterling will boost future inflation. The economic outlook, especially in the face of having to unwind or replace trade, regulation and other business-facing agreements within the EU and other partners, has deteriorated.

Local Economy & Development

The latest purchasing managers’ index (PMI) for SW England shows SW output fairly good but employment slipping back in June. These figures were recorded “pre-BREXIT”. Moreover, the SW regional economy tended to soften through the first half of 2016.

For the PMI series, apart from momentum over time, the crucial benchmark is whether the indices are above or below 50. The former indicates growth and the latter stagnation. It will be interesting to see, in response to BREXIT, whether the next reading for SW PMI output, (to be issued mid-August), will edge below the 50-benchmark, as the UK average did in July and the SW employment index already had done in June. Thereafter, the question is whether negative “BREXIT effects” persist.

Other surveys have shown similar recent trends. For example, the British Chamber of Commerce Survey for the latest quarter pointed to “sub-par UK economic growth even prior to the EU-referendum”. With regard to the future outlook, the mood has been generally more cautious than it was, with many sectors from manufacturing, through retailing and car sales, to property and other services declaring a sudden loss of business momentum after the referendum. What little evidence we have suggests there was an immediate drop in household spending, affecting retailing, tourism and leisure locally; a decline in property movements – affecting commercial and housing sales; and a continuation of caution with respect to business investment.  We do not know whether these were temporary or persistent effects.

In response to these developments, and the aggravated risks and eventual opportunities that lie ahead, the development question is how businesses and the various public agents mitigate any negative impacts. The significant drop in sterling will help some (exporters) but not all (importers and exporters dependent on imports of components and materials). In time, the likely increase in a range of input, factory and final prices will affect some supply chains and household budgets. Moreover, there is a fear that the continuing banking malaise (with share values down sharply from already low levels) may dampen the flow of credit – a key ingredient for maintaining growth.

The Bank of England stands ready to support the financial system (e.g. by relaxing banking capital requirements, lowering base rates, and issuing more quantitative easing). It believes the banking and insurance sectors are much more resilient to shocks than they were in 2008. Also, the new “May-Hammond” Treasury has indicated that it may be more willing to borrow and spend than its predecessor. Its ‘new’ industrial/EU-funding policies, however, are far from clear, (especially as the Business Department is being reformed).

Economic Outlook

According to the latest consensus compiled by HM Treasury (see table below), growth will be very sluggish in the next 18 months. The average forecast is for growth rates well below trend in 2016 and 2017 whilst CPI inflation is now expected to exceed the target (2% per annum) during 2017 and unemployment to rise back above 5.5%.

According to these ‘experts’, the outlook has changed dramatically. Indeed, average forecasts for growth in 2017 slumped from 2.1% (June survey) to only 0.8% (July survey) after the BREXIT vote. Moreover, the current account and public debt positions are worse for 2016 and only expected to improve marginally in 2017. The Bank of England perspective (in its forthcoming August Inflation Report) is expected to show a similar warning about a deterioration in economic prospects.

BREXIT has induced a change in mood, with the consensus about economic prospects shifting markedly downwards in recent weeks. Indeed, the drop in forecasters’ expectations has gained real expression with the downgrading of UK debt by the major credit rating agencies, the drop in the value of UK banking and other stocks, and the Bank of England’s FPC recent highlighting of risks to the financial system.

UK Consensus Forecasts: July 2016

  2016 2017
Growth +1.6 +0.8
Inflation +1.3 +2.4
Unemployment 5.3 5.6
  2016/17 2017/18
Current Account (£bn) -103.1 -82.1
PSNB (£bn) 67.4 58.3

Source: HM Treasury

Some of the new negative sentiment may fade after the initial shock but the danger is that the process of extracting the UK from the EU will generate a series of economic and political ‘aftershocks’ to the markets and the real economy and this could deplete confidence at a fundamental level.

As we have written before (see previous posts), the economics of BREXIT are straightforward. In summary, the creation of economic barriers, borders or boundaries, whether real or psychological, always leads to an increase in costs. That increase in costs, exacerbated by broader uncertainty, stalls investment, reduces output and cuts employment compared with what otherwise might have occurred. Thereby, the outlook for productivity and trade deteriorates.

The resulting fall in business profits and household incomes means less revenue for the government, which requires further fiscal austerity unless the government is willing to borrow more and grow the public deficit. In turn, these factors reduce realised and potential economic activity and confidence. At the same time, as higher costs are pushed through the supply chain, more inflation is generated, which, if accompanied by higher state borrowing, means, at some point, higher interest rates – a further dampener on future domestic demand.

It is important to note that in all these economic linkages and trends, we refer to outcomes in net, macro terms. There will be companies and workers in particular sectors that will benefit from the countervailing forces that always occur within any process of economic adjustment. There will be individual ‘winners’ and ‘losers’. The key observation, however, is that the net effect, for the economy as a whole and for the foreseeable future, is one of worsening growth prospects.

BREXIT will affect many Southern businesses and households. Some of these effects will be immediate and obvious; some will be postponed and insidious and some will not have noticeable impacts for several years. But, on average, in due course, less investment means less growth and lower living standards. We must not be distracted by one-off (good or bad) data releases or items of business news over the weeks and months ahead. The important thing is the change to performance potential, and its realisation, over the long run.

In the long run (after 2020), the economy may start to recover (assuming no major global ‘shocks’) from BREXIT.   In the very long term (perhaps, eight years plus), it may be back, or even beyond, where it might have been without BREXIT. The economy is a dynamic creature made up of millions of individual and group actors with diverse characteristics and behaviours. Uncertainty creates opportunity as well as fear. Human beings are inventive, innovative and entrepreneurial, especially as new generations emerge without the baggage of history. It is reasonable, therefore, to remain a long-term optimist about the economy.

For the near future, however, the prognosis is for a period/process of negative adjustment.

  • In the short run, this is likely to harm sectors dependent on current household and business spending first, though these effects may be temporary if incomes and employment hold up over the rest of 2016.
  • In the medium term, it will be the new trading adjustments that matter: 1) sterling depreciation helping exporters unless they are vulnerable to supply chain shifts caused by political uncertainty and higher import prices and 2) trade agreements and new tariff regimes for UK businesses active across the world. Both positive and negative effects are likely to ensue here.
  • In the long run, changes to corporate investment strategies will drive the impact. It is unlikely that global companies will see UK locations and facilities as favoured areas for investment to gain access to the wider European market. Importantly, it is changes at the margin that matter, specifically the potential for erosion of commitment to existing UK operations over time. Behavioural changes will gradually impact replacement and new investment demand. In a decade, the fear is that the next family of aerospace, motors and other engineering and electronics products and services go, at least partially, elsewhere, as trading costs and regulatory frameworks adjust to a new political reality

Analysis of current economic prospects makes regional development activity to boost the drivers of productivity even more vital. The development policy and delivery question is whether the negatives can be mitigated in terms of repairing or building local competitiveness over time. Even as the BREXIT storm rolls over us, we must prepare for better days.

BREXIT 3 – the decision

A small majority of UK voters have chosen to ‘leave’ the EU.  Now we will reap the economic deluge in terms of financial market shocks, lower investment and fewer jobs.  It will take a few years for the negotiations to assert some certainty back on the future path of trade and exchange.  It will take longer for the negative effects on inward investment to work themselves out.  The UK economy will be weaker than it otherwise would have been for up to a decade.  The SW economy will be poorer as key factories and facilities across the region are sidelined or lost, many household incomes are reduced and fiscal transfer resources are diminished.

The question, then, is how we respond to and mitigate these choices and negative effects.  The next Prime Minister, as well as negotiating with all our partners, has to instigate policies that will increase investment, raise productivity and drive development whilst dealing with the probable break up of the United Kingdom.  Hopefully, by 2025-30, we can look back and say “well, it was a painful adjustment but we did it and now the future looks bright again for England” (alone?).  Today, it’s hard to look ahead with confidence but the hard work starts now.

SW Gross Disposable Household Income in 2014

The annual release of sub-regional gross disposable household income (GDHI) data has just occurred.  The latest numbers are for 2014.  They show SW England generating £98.4bn of GDHI that year, up from £96.9bn in 2013: a modest increase of just 1.5%.  (Because CPI inflation was also 1.5% in 2014 that implies there was no real increase in household spending power.)  The annual growth range was from +4.1% in Swindon to -0.5% in Bournemouth and Poole.

The distribution of SW GDHI across the region, by LEP area, ranged from £29.8bn (30.3% of the SW total) in the Heart of the South West (HoSW = Devon and Somerset, including Plymouth and Torbay) to under £10bn (9.4%) in Cornwall and the Isles of Scilly (CIoS).  West of England (WoE = Bristol, Bath and NE Somerset, N Somerset and S Gloucestershire) contributed £20.1bn (20.4%) whilst the Gloucestershire, Swindon and Wiltshire, and Dorset (including Bournemouth and Poole) areas generated £11.8bn (12%), £13.1bn (13.3%) and £14.3bn (14.6%) respectively.

Turning to GDHI per head, in order to compare these areas better, puts Gloucestershire at the ‘top’ with £19,273 (7.3% above the UK average).  CIoS was at the bottom at £16,862 (-6.1% below).  HoSW was also below average (£17,579 or -2.1% below).  Dorset was second highest (£18,907, +5.3% below), then Swindon and Wiltshire (£18,818 or +4.8% below) and then WoE (£18,273, +1.7% below).  Again, in annual growth terms the range was from +3.3% in Swindon to -1.6% in Bournemouth and Poole.

Within these areas, it is striking how relatively ‘low’ the GDHI per head figures are for cities/urban areas and how relatively ‘high’ they are for county/rural areas.  For example, Bristol, Plymouth and Torbay all had GDHI per head readings more than £1,000 below the national average whereas Dorset county, Wiltshire County and non-Bristol WoE were all more than £1,000 above average.  Even in the more ‘balanced’ areas, such as Dorset and Wiltshire, the ‘county’ parts were above average whereas the urban parts were not.  (This is always in marked contrast to the sub-regional gross value added data which usually shows urban areas creating more output per head than rural areas: a reflection of commuting patterns and work/residence differences.

Roughly 70% of SW GDHI and GDHI per head comes from ‘compensation of employees‘.  This category grew by 2.9% in 2014, compared with 6.9% for property incomes received.

BREXIT 2 – uncertainty voting

The forthcoming referendum on UK membership of the EU will strongly influence UK economic ‘capacity, competitiveness and aspiration’ for years to come.

Future economic performance is heavily influenced by the psychology of value and relationships.  Anything that affects business and household confidence, communications and networking, especially if it increases uncertainty, affects behaviour and changes assessments of investment priorities, as based on prospective returns, costs and benefits.  This is why the whole EU debate ‘before the event’ is inherently inconclusive.  Nevertheless, here is some discussion of the key arguments ‘for and against’ based on some economic principles and experience.

Barriers reduce economic activity

Essentially, economists know – from theory and evidence – that borders, boundaries and/or barriers to trade tend to increase costs and decrease investment.  This means lower output and employment than otherwise would occur.  Therefore, most economics-based commentators – including recent analysis from the IMF, the OECD, the Bank of England and HM Treasury – believe there is likely to be a negative economic impact from a vote to ‘leave’ compared with a vote to ‘remain’.  (Of course, that may be a price worth paying for UK ‘control’ – if you think UK-based  politicians and administrators are, or will do, ‘better’ for you than Brussels- based ones.)

What is not clear is whether the adverse economic effects of leaving the EU (termed BREXIT – short for British exit) would have lasting impact or whether these effects might be mitigated – indeed eventually overcome – by future UK measures to support domestic development.  The question to the ‘leavers’ then, is what policies would you adopt to overcome any negative effects of BREXIT?

Importantly and conversely, a ‘remain’ vote is not a vote for the status quo.  There will be changes affecting UK economic prospects within the EU/Euro-Zone whatever the outcome of the referendum – (others may leave the EU even as, within it, the euro-zone gets tighter).  The question to ‘remainers’ is how would you make sure British interests shape the EU in a way that is economically positive?

Whether the UK ‘leaves’ or ‘remains’, the economic development question is still how to improve UK competitiveness over time.  This largely means investment in infrastructure, skills and innovation that raises long-term productivity potential and performance.

In or out, the key UK economic problems of low productivity and a lack of competitive capacity – as exposed by the UK’s huge current account deficits – remain to be addressed.  Whether it is ‘stay’ or ‘go’, the real economic debate is about what is to be done about the fundamental development weaknesses.  No one is addressing this.  If ‘we’ go, there will be costs to consider but the fundamental question is the same: what sort of UK do we want for 2030 and beyond and what/how are we prepared to invest to make it happen?

Meanwhile, the EU debate has already affected sterling, increasing its volatility (so far, down when BREXIT seems more likely and up when it seems less likely) and impairing financial market sentiment towards the United Kingdom generally.  At the margin, this may affect trading values and volumes, at least in the short term.  It will also impact relative inflation and interest rates to come. The question, then, is whether UK and local business have the will and the scale to exploit any opportunities for (short-lived) competitive advantage that emerge

BREXIT will probably not save money

A key analytical conclusion is that BREXIT would not come cheap.  Most if not more of the UK tax-payers’ money allocated to the EU will still be spent: the UK government will have to decide what to do at home for the farmers, the Cornish, for supported businesses and others who now receive significant flows “from Brussels”.

Then, there will be the costs of bilateral negotiation with the EU and all other trading partners around the world.  Diplomats, lawyers and accountants are going to do well from re-writing a vast array of contracts for government and business and plenty of civil servants and business planners will be needed to advise on, and to make, all the changes.  The UK will not fill up its fiscal hole by leaving the EU.

Moreover, trade negotiations always take longer than expected & tend to produce sub-optimal solutions based on compromise.  Judging by other recent trade negotiations, it could easily take 5-10 years to extract the UK from current contracts and processes and to replace them with new ones, especially as many existing commitments to the EU run until 2020 anyway.  The uncertainty in the mean time is an indisputable bad for trade growth.

Further, we cannot assume that all partners (in and out of EU) will be willing and able to negotiate straightaway.  Will the United Kingdom be given the kind of priority it might like and will it be offered the most favourable terms (as might be expected as part of the EU trading block)?  For example, as President Obama indicated recently, US trade representatives will be much more interested in settling (or not) the proposed cross Pacific and US-EU trade deals than they will be in starting any talks with the UK alone. The same arguments imply even more to other trading blocs and emerging markets, including the BRICs.

Meanwhile, the insidious side effects of continental trade preferences and prejudices will be free to work against UK companies and workers.  (Why would EU representatives consider UK business needs unless they happen to coincide with those of their own constituents?  Why would continental businesses and politicians not try to push negotiations towards outcomes that favour their own competitiveness over others?)

Indeed, exclusion of UK representatives from EU panels on trade, products and services to do with rules and regulations, specifications and technologies might move things away from preferred UK standards.  UK trade competitiveness, already inadequate, is unlikely to benefit from BREXIT for the foreseeable future even if positive outcomes can be achieved in the long run.

Investment will tend to be lower than the baseline

Investment is likely to fall with BREXIT.  At present, major academic, scientific, technical, and industrial research budgets are often allocated and used across Europe.  In this world, UK institutions (including our Universities and businesses) often punch above their weight. This will be harder to do after an exit poll.

Then, if you are a foreign-owned, UK-based multinational, faced with the uncertainty as to the eventual effects of a ‘leave’ vote and what it might mean for your business, at the very least, you will:

  • Wait and see – delay or cancel current investment plans – and/or
  • Re-direct investment to facilities still likely to be in the EU or in low-cost centres elsewhere – and/or, at worst, eventually
  • Close UK operations and supply EU/UK markets from elsewhere.
    As foreign direct investment softens, all this is bad for UK investment, exports, productivity and jobs.

Equally important is the wider effect on foreign direct investment.  Fewer non-European firms will see the UK as the best place from which to serve European markets and some of those who have, or would have, moved here from Europe because of the English language, more flexible labour markets, lower taxes and overall business friendly environment, will re-direct towards key EU markets, viz Germany et al.

These reactions mean less spending in the UK economy, lower output and fewer jobs, lower productivity and worse competitiveness.  Living standards will be lower than they might otherwise have been.

Even purely domestically orientated firms and consumers, facing uncertainties about the future prospects generally, may delay expenditure plans, weakening growth.  Moreover, relative UK borrowing costs (interest rates) and sterling volatility will rise, especially if expectations about future UK inflation increase above the continental norm, as they did in the 1970s.  Fiscal management and public borrowing could be disrupted, at least for a while.

Uncertainty and the creation of barriers to exchange damage the wealth creation process by reducing investment from trend and over the cycle, at least until all the new policy/trade arrangements are resolved and activated.

Labour markets will be softer and migration uncertain

If the UK leaves the EU, some workers will face a potentially more restricted labour market and adverse skills environment.  Job creation will be muted by the overall relative reduction in output and investment.

It is more debatable as to how net migration flows will be affected – that depends on what an ‘out UK’ chooses to do on border controls and working/residence visas, as well as how the EU ‘retaliates’.  The message here is that the more we restrict access, the less likely we will get favourable trading and labour relationships from our neighbours. The extent to which that is a ‘trade-off worth making’ is a political as much as an economic decision.

Generally, however, the continental/global opportunities for UK talent and domestic business access to external talent may be more comparatively constrained, at least as long as the period of adjustment to the new reality persists.

The long run is a ‘known unknown’ for the voters

In the long run, it is quite feasible for a positive relationship to arise between an “outside UK” and an “ever closer EU” (or at least more integrated Eurozone) and other parts of the global trading world.  By 2030, no economist, let alone politician, can say whether we will be better or worse off ‘in’ or ‘out’ of the EU.

All we can say is that the economy will be different and there will be winners and losers: some workers/households and some businesses/sectors will face worse prospects and some might get better ones.  Inventors, innovators and entrepreneurs will still exist.  They will adjust to the new realities and emerging incentives and act. There is no reason to be pessimistic about the inherent creativity of human beings in the economy over the long run.  It is the adjustment process from here to there that is uncertain, disruptive and potentially costly.

Sector concern

There has to be some concern for key export industries, such as aerospace (what happens to Airbus’ productive structure and supply chains over time – will French and German bosses in Toulouse change patterns of productive location and buying?.  What happens to foreign owners’ decision-making generally with regard to the spatial placement of future investment?  The SW aero-clusters are vulnerable in the long run.

Moreover, how will financial and other high value services (who can site many activities almost anywhere in a global, digital world) respond to changes in market access driven by the prospect of different requirements and rules, for example, between Frankfurt-Paris and London?

As European attitudes and confidences shift, there will be unpredictable effects on the ‘visitor’ economy, retailers and, indeed, universities/student flows, particularly if sterling moves adversely.  Will Dutch holidaymakers still want to visit SW England and will SW holidaymakers still want to visit the Continent?


Some of the main economic effects of BREXIT will occur through short-term decisions about trade and investment, but there will also be long-term effects as demand patterns and productive and trading structures adjust.

In the years after a ‘leave’ vote – possibly over a decade or more, increased uncertainty will cause the economy to grow less, than it might otherwise have, in terms of output, jobs and incomes.  This is not to judge that BREXIT is right or wrong, per se, as a political or social choice.  It is just to acknowledge that the economics is clear – it is not a cost or risk free option.

But, then, neither is ‘remain’.  Even after a vote to stay, there are bound to be ‘unforeseen’ consequences, as the EU, and the EZ within it, changes.  If the UK votes to ‘remain’, it still has to deal with the German/EZ desire to forge an integrated core based on tight policy rules and regulations and fiscal unity – arguably distinct from the wider EU.  Moreover, there are some ‘dodgy’ candidates for EU membership knocking at the gates. The risk is that we stay in a ‘club’ that develops a strong, two-tier membership and that our sensible aversion to the euro means we are in a group with the dross rather than the elite.

“Remain’ is not a ‘failsafe’ option because it could mean we are more of a ‘decision taker’ rather than a ‘decision maker’.  Furthermore, it does not absolve us from decisions about how our economic future will evolve, including how we address longstanding economic deficiencies at home and how we cope with a change of power relationships abroad.

Damned if you do and damned if you don’t. The key is that, either way, the development priorities remain to be addressed: the only security for future economic health and wealth is that the UK economic team plays at the top of the productivity premiership.  As with AFC Bournemouth, which has survived its first season in the top flight of English football, the trick is now to consolidate and develop the economy further to stay in the running and ‘win’ over the long term.


Next Generation First – UK Budget 2016

Another complicated budget from Chancellor Osborne.  Lots of tinkering with the tax and spending systems in Conservative ways that may distract from the gloomier economic numbers and the further austerity to come.  That is not a criticism just an observation.

Let’s start with the macroeconomics.  A slowing global economy, fragile financial markets and low productivity growth everywhere sees the Office of Budget Responsibility cutting its growth and inflation forecasts and, crucially, its assessment of future productivity potential.  With employment still set to be the main engine of growth, UK real GDP is said to rise only 2% in 2016, down from 2.4% as forecast as recently as early December.  The OBR could still be optimistic for this year, especially if BREXIT uncertainty increases and cuts investment and consumption even more than currently expected.  Despairingly, only 2.1% growth is now seen as the underlying trend for this Parliament even if EU membership is retained.  Inflation only returns to target (2% per annum) in 2018:  a sorry tale, which monetary policy, with the threat of negative interest rates, is not helping.  (Alarmingly, the FPC has been told to be particularly vigilant over the state of the banking system from now on.)

The economic forecasts mess up the government finances, keeping borrowing up in the near term and worsening debt ratios over the forecast period (debt/GDP 82.6% in 2016/17 and only down to 74.7% in 2020/21).  The fiscal surplus target is delayed until 2019/20 – just in time for the next election when the Chancellor might be tilting for another job?  Against this background, government spending is set to fall from 40% to 36.9% of the economy by 2020, as the government departments seek to find another £3.5bn a year by 2019/20.

The state is seeking to get more funds by finding £12bn from further measures to cut tax avoidance and evasion.  Promise of a further cut in corporation tax to 17% and reductions to business rate thresholds, commercial stamp duties, and oil and gas taxes is offset by attacking loopholes, mainly exploited by large corporations.  The Chancellor is selling a theme of large companies pay more and small companies pay less.

Other goodies are offered in the great devolution dance, for the national administrations and the English regions.  From halving Severn tolls in 2018 to a combined authority for East Anglia, the Treasury offers a plethora of devolution measures that may yet turn out to be more mirage than substance, especially if you have not got an elected Mayor.  The aim of 100% of local authority resources being raised and spent locally by 2020 is a transformation that could turn out to be highly stimulative and yet highly divisive.  Yet another experiment in local development that may or may not be real before it becomes politically unacceptable.  It is interesting that the Treasury is cutting business rates just when they are going to devolve them to local authorities!

This Budget claims growth is driven by infrastructure, education and enterprise.

  • On infrastructure, the government will commission various road and rail schemes in the north (M62 widening/HS3 rail Man-Leeds/Man-Sheff tunnel), London (cross-rail 2 but nothing on a 3rd runway) and the South West (rail resilience).  Meanwhile the insurance premium tax goes up another 0.5% specifically to pay for flood defences.
  • On education, all schools are to be, at least, on the way to Academy status, independent of local authorities, by 2020.  There are plans to boost performance in northern schools and to devise a new funding formula for all schools.  On childhood obesity, the government is introducing a levy system on soft drinks in 2018 in order to promote more sport and other activities ‘out of’ normal school hours.
  • On enterprise, class 2 national insurance contributions will be abolished in 2018, (helping the 3mn or so self-employed), most indirect taxes remain frozen, and capital gains taxes are cut from next month (base 18% to 10% and higher 28% to 20%).

Finally, with regard to personal taxes and savings, everyone’s finances are helped.  For example, the personal income tax allowance will rise from £11,000 to £11,500 in April 2017 and the higher rate threshold will reach £45,000.  The Chancellor also announced measures to help the under 40s to save, recognising the bewildering position that exists at present with pensions and other investment opportunities in a world of zero interest rates.  The existing personal ISA limit increases from just over £15,000 to £20,000 in April 2017.  A new “Lifetime ISA” will be created for the under 40s and until you are 50.  As long as it is to be used for long-term savings (pensions or housing), savers can put £4,000 into this ISA and the government will add £1,000 per annum.  Te help to buy ISAs (only just started) can be rolled into this new Lifetime ISA.

The budget is being headlined as one that puts the “next generation first”.  Many parts of the Budget come later rather than sooner, however.  There is a lot of detail to be worked out and many consultations to conduct before those details are finalised.  Moreover, there are negative aspects in the detail yet to be analysed.  Overall, the real worry is still in the macroeconomy.  If realised, the wider risks could blow all these complicated fiscal measures and intentions out of the water.




In 2016/17, there will be a UK referendum on whether or not to stay in the EU.  Most of the arguments, particularly currently espoused about what PM Cameron might secure in terms of EU reform, are political.  What about the economics?

  1. In or out, it won’t come cheap.  Some EU-sceptics talk about repatriating funds from the EU worth £50mn a day.  Dream on – that’s gross and the costs of extracting UK from all the current arrangements will cost money.  If there is no Common Agriculture Policy or development funds for Cornwall, do you think the UK government will do nothing to soften the blow for those affected at home?  Just think how much money the lawyers are going to make from re-writing contracts and how many civil servant/ bureaucrats we’ll need to make the change…  It could easily take five years to extract the UK from current contracts and processes and replace them with new ones.
  2. Meanwhile, there will be an investment strike.  If you are a foreign-owned multinational based in the UK, faced with great uncertainty as to the vote and its eventual result, at the very least, you’ll 1) wait and see or 2) you may re-direct investment to facilities still likely to be in the EU or low-cost centres elsewhere and, at worst, 3) you’ll close UK operations and supply the UK market from continental Europe – with potentially disastrous consequences for UK exports  and productivity.
  3. UK borrowing costs and sterling volatility will rise and fiscal. management may be disrupted, at least in the near term.  This will also encourage overseas rather than domestic activity – investment, employment and trade.  Again, uncertainty and borders restrict exchange and wealth creation.
  4. Migration flows will shift – unpredictably.  The UK recovery has benefited from net migration over the last few years – this could reverse, again with a short term negative economic shock and, perhaps, wider politico-social (e.g. NHS) effects.
  5. In the long run, however, it is quite feasible for a good relationship to emerge between an outside UK and an ‘ever closer’ EU, as it does for Norway, Switzerland, et al.  In a decade or so, no economist, let alone politician, can tell you whether we’ll be better or worse off in or out of the EU especially if, as a result, Scotland becomes an unreliable, one-party, independent state.  All we can say is there will be winners and losers and it won’t be easy to spot who will be which, bar the usual suspects.

    The economic issue for me is the short term – by which I mean 3- 5 years after an ‘out’ vote.  BREXIT will cost the UK a lot of economic activity and potential that it might otherwise haveBREXIT still might be the right political and social choice for our island race.

    I only hope the forthcoming debate makes the real costs and benefits of the two options clear to us all in great detail before we get to the actual vote.

2015 revisited – 2016 considered

The latest numbers show UK real GDP growth slowing from 2.9% in 2014 to 2.2% in 2015.  The year ended with a 0.5% quarter-on-quarter rate of increase in the last three months of the year: services continued to thrive but manufacturing and construction were soft.  At the same time, there was no inflation (CPI average) last year whilst unemployment dropped towards 5%.

In simple terms, the UK economy is being driven by employment growth and, with little or no productivity growth and adverse external factors – (China, oil and stock markets, Middle East and immigration, Brexit etc), current economic momentum is not sustainable.  Further slowing of growth is expected in 2016.  We are not yet talking about a return to recession but, with our real growth forecast now expected to be 1.6%, it looks like being a sluggish year ahead.

New Year Blues – Waves of Uncertainty

In early 2016, the world economy appears to be floundering. The imbalances of financial, trade and other flows that were exposed by the “Great Recession” have never been properly resolved. Waves of new uncertainties are taking their toll, breeding fear into business and investor confidence at a time when stabilisation policy options are stretched and seemingly ineffective.

The first uncertainty concerns the Chinese Economy.  China is still growing faster than many others and there is no particular reason why the slowing of Chinese real GDP growth to what are still relatively fast rates (over 5% per annum) should affect the mood right now as opposed to in any other period – past or future.  A correction, however, is underway, as a) the Chinese currency falls, b) Chinese political risk rises – pushing its claims over various offshore islands, c) accusations are made about Chinese product dumping in US and EU markets, and d) financiers worry about China’s ability (and will) to continue propping up subsidised industries and banks carrying bad debts.

The second uncertainty reflects events across the Middle East and North Africa to do with Syrian and other civil and religious wars and terrorism, population disruption and exodus, and relations between Iran and Saudi Arabia.  Russia and the West are also at loggerheads and relations between the EU and its near neighbours are strained to east and south.  Some of these issues look irredeemable at the moment. The failure to constrain the effects of the conflict to a small geographical area could be serious.

The third (and partly related) uncertainty is the oil and other commodity markets. The drop in prices undermines fiscal stability, growth and earnings in a number of countries, led by Russia, Brazil and even Australia.  Oil prices have fallen below US$30 a barrel. It is not unusual for oil prices to have periods of high volatility and wide swings as the demand and supply balance adjusts. Although there are significant lags in the process of adjustment, what goes down will come up. Already, there is talk of the supply chain drowning in oil. This will lead to stoppages, closures and mothballing at the wellhead. Supply will fall again and, since world demand continues to grow, oil prices will get back to US$100 a barrel – not now, but eventually.   Meanwhile, low oil prices are good for most of the business economy, at least in the short term. Why are investors panicking about something that should be boosting non-oil profits now? Methinks, it is another case of too much contagion for the markets’ own good.

The fourth uncertainty is about equities themselves. Was the run up in share prices over the previous three years or more a ‘sugar high’ related to the enormous liquidity pumped into the system through various bouts of Quantitative Easing and related monetary largesse by the West’s central banks? Is there real value in the corporate world or is it all built on sand? Today, the markets seem to believe the latter. But, they may be wrong. First, a lot of the excess liquidity was never made active. Second, technological progress and innovation is gathering rather than losing pace. Despite some demographic ageing, the medium to long-term prospects for growth and development do not seem diminished. Yes, we need to get western productivity rates up to support living standards but that calls for more investment and net inward migration, not less. There is a positive story to tell about the underlying economy that should outweigh the short-term ‘bears’, eventually.

The fifth uncertainty surrounds politics in America and Europe. The possibility of a Clinton-Trump contest for the US presidency in next November’s election is alarming many. One is reminded of Churchill’s famous statement along the lines of “America will always do the right thing … after it has flirted with all the other options”.   There may be scope, therefore, for a political bounce in economic prospects, as we approach the election and a rational outcome seems more likely. Meanwhile, there is the matter of UK-EU negotiations for ‘real’ reform and the UK’s in-out referendum. The current betting is on some sort of ‘offer’ kicking off the full referendum debate in late February and being resolved by a vote in the summer. The polls are close and the reform proposed is unlikely to satisfy the sceptics. The question is whether the majority of middle-ground Brits will “do the right thing” in the end? No one knows. But, I worry about the investment delaying and diverting effects of the debate and the vote itself. In the short term, why would companies invest in UK industries until a resolution of ‘BREXIT’ emerges? In the long term, why would you expand UK operations if access to the single EU market is no longer guaranteed on competitive terms? To a regional development economist, borders and boundaries are always a constraint on economic potential and performance.

So, there are five reasons to be unsure about the external environment for UK economic prospects. How do domestic factors play into this mix?

First, 2015 was a year of slowdown. Real GDP growth was barely on trend (c 2.3%) and was weaker at the end of the year than at the start. There was no inflation overall, although this hid wide swings between segments, such as houses (+7.7% year to November) and energy (-7.3% year to December). Meanwhile, unemployment fell to 5.1% overall (September-November). The employment-led recovery is intact but, inherently, it is unable to spark a strong upturn without support from higher productivity, which remains in the doldrums – at a level only just above its previous peak. The demand chain is propped up by the effects of modest real earnings growth on private consumption but, unless and until it is supported by other demand factors (business investment and net trade), this is not going to last – especially if, as expected by the forecasters, the labour market is now leveling off.

Second, the economy is not rebalancing. The trade deficit remains huge and volatile, and the current account is being worsened by a collapse in returns from UK FDI abroad. At about 5% of GDP, the current account deficit remains unsustainable for the long term. Also, manufacturing continues to struggle against global headwinds, as typified by the headline loss of capacity in the steel industry. Manufacturing output is still some 6% below its previous peak (Q1 2008). Since the recession, there seems to have been a permanent loss of productive capacity and a worrying erosion of viable supply chains.

Third, the policy environment is tortured. The public deficit is responding very slowly to fiscal austerity. As yet, ‘crowding in’ of private activity as the public sector retreats is a myth. The monetary environment remains incredibly loose, with low interest rates continuing to dampen investment’ (saver and investor) spirits and, thereby, prospects for underpinning sustained growth. Lost in an austere liquidity trap, the stabilisation policy mix is not supporting growth.

Against this background, the forecast consensus is for a weaker economy in 2016. The January collection of independent forecasts issued by HM Treasury sees growth averaging 2.2% this year after 2.3% last. This represents a downward adjustment by the forecasters from late last year, but still seems modest. Given what’s happening in the financial markets, it would be astonishing if these forecasts were not revised below 2% for 2016 over the next few months. My own current estimate is 1.75% for growth in UK real GDP this year. Importantly, as highlighted above, the downside risks are significant and potentially bigger than the upside.

Other current consensus forecasts include:

  • Inflation is expected to rebound a bit: +1.3% for this year after zero in 2015, largely because of previous ‘bigger’ falls dropping out of the index.
  • Unemployment is predicted to average 5.1% – a rate it has already reached, suggesting no further progress in 2016.
  • The current account deficit is expected to improve barely at all – from £81.5bn in 2015 to £77.6bn in 2016. This is also a “no change” view.

The UK economy is losing momentum and, in several ways, 2016 already looks like a ‘lost year’. Given the waves of uncertainty crashing on the economic beach at the moment, the fear is that the outlook deteriorates from something fairly benign into something worse.

There are some more hopeful signs. It is entrepreneurs, workforce skills, innovation and competitiveness that drives the growth process, not the financiers and panicky markets. There is no evidence that these factors are diminished. Indeed, they are what have been keeping the recovery going despite the headwinds of poor policy and politics. Some of the new technologies will be disruptive for jobs – aspects of artificial intelligence and new consumer interfaces (clouds, hand-held information and communication outlets and driver-less cars). Nevertheless, let us pray that the value-creating songs of the inventors and the risk-takers are not drowned out by the New Year Blues now so prominent in our ears

Regional GVA in 2014

In December, the ONS releases the gross value added (GVA – income based) and GVA per head data for the UK regions, devolved administrations and lower geographies. This provides our basic comparative measure of local economic performance.  It is a corner stone of most UK applied economic analysis below the national level. The table below summarises the new, local data for 2014.

Southern England 2014

2014 GVA


GVA per head (£) GVA per head (UK = 100)
Bournemouth & Poole 7941 23254 94.5
Rest of Dorset 8248 19719 80.1
Somerset 10641 19648 79.8
Plymouth 5195 19864 80.7
Torbay 2066 15354 63.1
Rest of Devon 15418 20146 81.8
Swindon 6551 30357 123.3
Rest of Wiltshire 9841 20369 82.7
Southampton 5782 23572 95.8
South Hampshire 11048 24568 99.8
Central Hampshire 14164 26479 107.6
Portsmouth 5381 25735 104.5
Isle of Wight 3071 22074 89.7

Source ONS

The new data confirms many of the descriptive characteristics that we already know about local southern economies. The relative performance of the regional economy seldom changes significantly over time.

  • Last year, was one of relatively good GVA growth, with averages for the UK as a whole of 3.6%), for SW England of 3.1% and for SE England of 2.8%.  Given negligible inflation, these are virtually real rates of growth.
  • Within southern England, north and east tends to perform ‘better’ than south and west. Also, urban areas tend to perform better than more rural areas.  This is normal, reflecting the workplace basis of the data, sector spatial characteristics and a typical concentration of high value economic activity in the more urban parts of any area.
  • Relative to the UK as a whole, southern GVA per head tends to be below average, but this reflects the effect of the ‘black hole’ that is Greater London on that average rater than any underlying weakness or fragility.

As well as providing new data, the ONS revises its numbers for previous years. This can change history quite markedly, although this time the revisions have, generally, been reasonably modest. Summarising the latest long-term series for GVA per head indices,

  • Relative performance has been fairly flat over the last two decades. The comparative scores have tended to sag a fraction.  The SE index tends towards 110 (10% above) versus the UK average whereas the SW index tends to 80 (20% below).
  • Generally, the historical series are remarkably consistent. It seems to be difficult to shift these fundamental measures of relative local economic performance over time, despite cyclical ‘booms and busts’ and profound structural changes to industry, technology and demographics.

A third aspect of the new local information is the sector breakdown by major industries.  The sector data for 2014 confirms that:

  • In aggregate terms, SW manufacturing and construction were only 11.9% and 6.8% of GVA respectively.
  • Amongst services, 17.9% of total SW GVA were distribution, 34.2% were financial and business, and 20.6% were mainly in the public sector.

GVA is our base indicator of economic performance. The latest figures show southern areas holding their own (within the regional economic league tables) and maintaining their industrial structure.  2014 was a good economic year.  There has been some loss of momentum in 2015.  Nonetheless, it would be a surprise if the relative score has moved much in aggregate terms and in terms of industrial structure over the last twelve months

The development community may wish and is tasked to shift its relative economic score over time. This means a relative improvement in measures such as GVA per head. This may be a worthy aspiration but it needs to be tempered by a healthy dose of realism. Without radical change in the economic fundamentals (including major investment in infrastructure, innovation and skills, competitiveness, and the wider capital base), the best that might be achieved is running to stand still.

Radical change means an emphasis on private sector productivity, engagement with markets and technologies, and a focus on the quality of our environmental and human capital.  In the years ahead, that would be a sound, strategic vision for growth of, and development in, the southern economies.


Autumn Statement – fortune favours the brave

In headline terms, the Chancellor’s Autumn Statement/Comprehensive Spending Review surprised many commentators, from its withdrawal from cutting tax credits to its lower than expected percentage cuts in many departmental expenditure settlements.  Nevertheless, overall, it remained an austerity budget based on higher taxation and lower public spending.  It is a settlement that, if fully enacted, will, itself, tend to detract from economic growth over the next five years.  Some of the measures, however, will re-direct activity to the private sector and, in theory, might ‘crowd in’ more private activity.

These ideas should be evident in the macroeconomic forecasts published by the Office of Budget Responsibility at the same time as the statement.  In fact, the forecasts offered are remarkably flat.  If the OBR is right, we are in for a period of rather boring overall macro trends with subdued growth in output and investment, in inflation, and in employment and productivity, leading to a gradual improvement in the public finances (see table).

OBR Forecasts November 2016 2015 2016 2017 2018 2019 2020
Real GDP (%ch pa) 2.4 2.4 2.5 2.4 2.3 2.3
Inflation (%ch pa) 0.1 1.0 1.8 1.9 2.0 2.0
Employment (%ch pa) 1.3 1.3 0.6 0.6 0.3 0.6
Productivity (%ch pa) 1.1 1.1 1.9 1.8 2.0 1.7
Investment (%ch pa) 6.1 7.4 7.1 7.0 6.6 4.5
Unemployment rate (%) 5.5 5.2 5.2 5.3 5.4 5.4
2015-16 2016-17 2017-18 2018-19 2019-20 2020-21
Deficit borrowing/GDP (%) 3.9 2.5 1.2 0.2 -0.5 -0.6
Debt/GDP (%) 82.5 81.7 79.9 77.3 74.3 71.3
Source: OBR

The more interesting facets of the announcements are micro in nature.  The local impacts of the devolution measures on governance and business rates, conformation of local development ‘growth deal’ funding, the creation of more enterprise zones, the infrastructure and house building proposals, and the buy-to-let stamp duty, apprenticeship levy and other taxes may have a profound effect on the way local economy’s develop over the next five years.  Although the central view is that this will not affect very much the underlying potential growth rate of the economy as a whole, there is plenty of cope for unforeseen consequences and distributional effects to be significant.

In SW England, we will be particularly intrigued to see how plans for devolution, (particularly the prospect of local government rationalisation in Dorset), and the new/extended enterprise zones at Dorset Green (Wareham), Bristol and Bath/Somer Valley, and Heart of the SW (Exeter and Bridgwater) will develop.  History suggests our expectations should be cautious … but, perhaps, fortune favours the brave.