AS THE DEADLINE DAY approaches for Britain to leave the European Union, the Tory government led by Theresa May careers on like a car heading towards a brick wall where the driver has lost control of the wheel. Already, the incompetence of the government, more intent on preserving power than reaching any deal, and huge uncertainty about what is going to happen have had a detrimental effect on the British economy.
The value of the pound has already plummeted more than 20% since the referendum two years ago. And the very latest figures for the British economy are bad. Real GDP growth was just 0.2% in the fourth quarter of 2018 over the previous quarter. Indeed, the industry and construction sectors actually contracted. Manufacturing output has been shrinking for six months. Real GDP growth year over year (from the fourth quarter of 2017 to the fourth quarter of 2018) has slowed to just 1.2%, the slowest annual rate since 2012. Business investment in new technology, plant and equipment has also slumped badly for four consecutive quarters and is down nearly 4% year on year. As a percentage of GDP, business investment has been falling for over three years. British business is on an investment strike. Whereas the UK economy was doing better than most other G7 top economies in 2015, it is now doing even worse than Italy.
This is not all because of uncertainty over what happens with Brexit. It is also due to the global slowdown, particularly in Europe and China - and to the weak productivity growth of British business and its increasing inability to compete in world markets. Only the finance and business services sectors are holding up. And that will soon suffer too. The risk of an outright recession in 2019 has risen sharply. Indeed, higher inflation and slower economic growth in the last two years have hit the average British household hard. The TUC found that the average worker has lost £11,800 in real earnings since 2008.
The Bank of England’s economists reckon that if there is a ‘no deal’ Brexit, then the UK economy could shrink 8% in 2019, while interest rates would rise to 5% to protect the pound and guard against rampant inflation, and house prices would fall by up to 30%. This would be a bigger decline that during the Great Recession of 2008-9. And even if there is a ‘transition deal’, the next two years are likely to be fraught with uncertainty for British capital, while some sort of trade deal with the EU is cobbled together. Indeed, so difficult might that be (even excluding the thorny problem of the so-called backstop for Ireland), that the transition period might have to be extended into 2022!
But let us look further ahead. Assuming the UK leaves the EU in March with a transition deal in place and eventually some long-term trade arrangement is reached with the EU, what are the prospects?
Most long-term forecasts by mainstream economic institutes reckon that there would be an accumulated loss in real GDP over the next ten to 15 years of between 4-10% of GDP from leaving the EU. That’s equivalent to about £1,000 per person per year. It all depends on whether any deal keeps the UK in a customs union (with similar tariffs and border regulations) with the EU and what parts of the existing Single Market (freedom of movement of labour and capital and citizens’ rights) are preserved.
But whatever the final deal (or no deal), it does not mean an actual fall in UK GDP over the next ten to 15 years. This cannot be emphasised enough. The UK economy will not be smaller in ten years if it leaves the EU, it will just grow slower than it otherwise would have. The current average growth rate for the UK has been about 2% a year since 2010, which is down from an average 2.6% a year before the Great Recession in 2008. Most mainstream forecasts are predicting a slowing of the growth rate to between 1.3-1.6% a year, depending on the nature of the final deal with the EU.
The problem with these forecasts is that they ignore the elephant in the room for the UK economy - another global slump or recession. A slump as the UK economy experienced in 2008-9 would deliver much more long-lasting damage to national income than even a ‘bad Brexit’ deal. I calculate it would be four times as much as the worst outcome from Brexit.
On leaving the EU, what little British labour has gained from EU regulations will be in jeopardy within a country which is already the most deregulated in the OECD. The EU rules include a 48 hour week maximum (which is riddled with exemptions); health and safety regulations; regional and social subsidies; science funding; environmental checks; and of course, above all, free movement of labour. There are 1.5 million Brits living in other EU countries and two-thirds of the long-term residents (800,000) are working (not retired).
EU immigrants (indeed all immigrants) have contributed more to the UK economy in taxes and in filling low-paid jobs than they have taken up in public services etc. That’s because most are young (often single) and help pay pension contributions for those Brits who are retired. But the Brexit referendum has already brought about a sharp drop in net immigration into the UK from the EU, down 50-100,000 and still falling. That can only add to the loss of national income and tax revenues down the road.
The EU is a ‘capitalist club’ in that it was set up to improve trade and integrate small nations within Europe so that Franco-German capital could lead a new force to compete with the US and Japan (later China). But then the UK is also a capitalist state and its economy will still be determined by market forces and big business - in or out of the EU.
So whether the UK remains or leaves the EU is not pivotal for working people. What matters is whether there is a complete change in the control of investment, employment and production. A Labour government that aims to make such a pivotal change will be faced with vehement opposition by the forces of capital, whether the UK is in or out of the EU.
» Michael Roberts blogs at https:// thenextrecession.wordpress.com. » His new book, World in Crisis, with Guglielmo Carchedi, has just been published by Haymarket. https://www.haymarketbooks.org/ books/1216-world-in-crisis
works in the City of London as an economist.