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Brexit: Why 'Project Fear's' Predictions Could Be Coming True After All

As the 10-year anniversary of the Credit Crunch looms, warning signs emerge. But not everyone agrees.

05/08/2017 10:08
Dylan Martinez / Reuters
David Cameron told factory workers last year that Brexit would cause an economic 'shock'

“Let’s just remember what a shock really means,” David Cameron told factory workers last March. “It means jobs being lost. It means mortgage rates might rise. It means businesses closing. It means hardworking people losing their livelihoods.”

Yet such claims made during the EU referendum about the financial consequence of Brexit did not play out as many Remainers had predicted.

The UK economy did not fall off a cliff after last June’s vote. In fact it grew, slightly, as consumer demand appeared to boom, exports and employment rose.

But now the dire predictions made by the former PM and other Remain campaigners, including current Chancellor Philip Hammond, could slowly be coming true, according to leading economists.

Signs that Britain’s economy could flatline have begun to emerge, and last week the Bank of England retained its historic-low base rate at 0.25 percent, citing deep uncertainty.

And the Bank lowered its growth forecast for this year from 1.9 percent to 1.7 percent, with next year’s wage growth forecast cut by 0.5 percent.

“Consumer confidence is now as low as it was immediately after the Brexit vote,” Raj Badiani, Director of European Economics at IHS Markit, told HuffPost UK. “Wage growth is slowly and slowly decelerating.

“Meanwhile firms are worried about a double whammy,” he added. “Slow UK growth and consumers retreating and paying off debt, and then to make matters worse, not knowing if their export market in Europe is going to be there in three years time.”

“There is a feeling that there’s difficult times around the corner.”

Consumer confidence

In the immediate aftermath of the referendum, aside from some initial turmoil in currency markets, the overall economy appeared buoyed by higher consumer spending.

But now it appears as though much of that was fuelled by a boom in consumer credit.

“It’s not as if we’ve had ‘good’ consumer spending, it’s been driven by households running down savings and putting it on their credit card,” James Knightley, Chief International Economist at ING told HuffPost. “That’s not a positive for long-term health in an economy.”

“The UK economy has shown commendable resilience after the Brexit vote but a lot of that has been fuelled by consumer spending, partly driven by insatiable demand for credit,” Badiani added.

The spiralling levels of consumer debt, which neared an eye-watering 89 per cent of Britain’s gross domestic product, prompted the Bank of England to force new measures on banks to curb lending last month.

“The demand for credit is keeping the economy above water. At some point that needs to stop,” Badiani said.

As consumer confidence falls, people tend to get their finances in order, paying off debt rather than spending - with dire consequences.

“It will cause a lot of turbulence,” he added.

“If growth stalls or stagnates in the third quarter, we could be looking at a period of stagnation or mild recession in the UK around the end of this year or the beginning of next.”

Wage growth

Wages adjusted for inflation fell by 0.6 per cent year-on-year in the three months to April, following a 0.3 per cent fall in March - crucially, well below inflation - the rate at which the cost of living increases.

“It clearly signals there are strains in households,” Knightley said. “Because normally wages rise faster than the cost of living so you’ve got more cash in your pocket each week to go and spend, then you get good growth in the economy.”

Mark Carney linked the issue to Brexit at a press conference last week. “Some firms, potentially a material number of firms, are less willing to give bigger pay rises given it’s not as clear what their market access will be over the next few years,” he said.

“What he was hinting at is that firms now may be tempted to sit on pay increases and give out as little as possible because of the uncertainty,” Badiani explained. “They don’t know their market access, and that’s bad news for the UK economy.” 

Firms clueless as to whether they can trade with Europe after 2019 are likely to be putting off wage rises in the meantime.

“If you’re uncertain about the trading environment then you’re not going to increase your cost base dramatically,” Knightley said.

“Businesses are not prepared to put money into giving their workers more pay yet. It’s not a great story in terms of the growth outlook.”

Business investment

And just as firms appear to be refraining from pay rises, they are also hesitant to invest more generally.

“If you were a business would you be putting some money to work right now when you just don’t know the trading environment you’re going to be faced with?” Knightley asked. “Your shareholders would prefer you to sit on your hands to wait for the opportunities to come rather than try to second guess what politicians are going to come up with in the next two years.”

“It’s all about good communication and handling the negotiations transparently, which the government hasn’t so far,” Bediani said. “That could be the final shove to throw the UK economy into recession.”

But it’s not all bad news, however.

“All this will be offset by better than expected export growth, that’s a result of Sterling depreciating against the Euro and the Dollar,” Badiani said.

“Also we’re seeing better demand conditions across the Eurozone. A more competitive currency, better demand conditions in the UK’s main export market, which means exports will take some of the pain away.”

And the chair of Leave Means Leave, former British Chamber of Commerce head John Longworth, said he believed the dire warnings represented “Project Fear mark II”.

″The Bank of England is notoriously bad at forecasting,” he told HuffPost. “And I could find an equal number of economists who would say the economy will grow.

“I do agree there is an unnecessarily low level of business confidence at the moment. 

“It’s unnecessary because the Chancellor, at the moment, is setting us on a course to salvage as much as possible. But we can’t do that, so by definition we will be worse off.

The government should build business confidence and strengthen its negotiating position at the same time by acting unilaterally.”

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