9 May 2018

It is official – Brexit squabbling is damaging the economy


The British economy is slowing. There. I have said it. After repeatedly writing upbeat pieces for CapX to counter the doom and gloom mongers in the last two years, the facts are changing and so is my mind.

I would go further and say that the weakness of the economy, much of it Brexit-related, is going to put the skids under the tedious stasis which passes for political activity in Westminster these days. Voters are going to be cross.

Extreme Remainers and Brexiteers in Parliament better watch out in case they get the blame. And horror of horrors, Jeremy Corbyn’s claim that there is something fundamentally wrong with the way the economy is managed might yet land on fertile ground.

In the first quarter of the year, the initial estimate from the Office for National Statistics (ONS) found that the UK economy grew by a paltry 0.1 per cent, mostly due to a downturn in construction, though there was weakness across the board.

It is only the first estimate, so will almost certainly be revised upwards and anyway construction will pick up with the better weather. But even so, that is a long way short of the 0.5-0.8 per cent a quarter we frankly should be growing at if the economy was to be fulfilling its potential.

The picture is even worse when you look at GDP per capita, which actually fell by 0.1 per cent in the first quarter. This is especially disappointing when you consider that the world economy is barrelling along, with world trade growth actually accelerating for the first time since the financial crisis.

According to the Sunday Times, the Bank of England is going to respond by cutting its own growth forecast for the year from 1.9 per cent to 1.5 per cent.

Behind the headline numbers there is more cause for concern. Consumers have been borrowing to sustain their lifestyles in the last year or so, but there are signs that they are exhausting their credit appetites or limits. Credit card borrowing actually went backwards in March and in the corporate sector there are constant reports that marginal borrowers, such as cranky old retailers, are going bust.

The Government’s mismanagement of the housing market is also starting to reveal itself. Its Help to Buy scheme has encouraged more than 100,000 first time buyers to acquire homes with a tiny 5 per cent deposit, accompanied by an equity loan of up to 40 per cent from a quango called Homes England.

The equity loan carries no interest for the initial five years, and thereafter it charges a fee of 1.75 per cent, rising by RPI plus 1 per cent per year. The first cohort going through the system, who bought their homes in 2013, are now paying these fees while at the same time the Government is trying to sell the loan book to private investors.

There is one big problem. Help to Buy artificially inflated the price of homes and now prices are slipping in some parts of the country, notably London, where the ONS says they fell 1 per cent last month. If a house price correction gathers pace, those little stubs of equity could be wiped out or dented. The proper response ought to be for Help to Buyers to refinance. But how can they do that if house prices are dropping and they have negative equity? No wonder consumers are feeling the strain.

In further news to cheer us all up, Donald Trump’s row with Iran has elevated the oil price to $77 a barrel at the time of writing, a four-year high. I went past a petrol pump showing 130p a litre for the first time in ages this week. Rising petrol prices will, I am afraid, cause another jump in inflation. Let’s hope Iran sees sense and comes to a deal with the American president soon.

What are the causes of this British economic malaise? Leaving aside the policy missteps by the Government, notably in loading up millennials with crippling debts via high-interest student and housing loans, it doesn’t take a genius to work it out: Brexit.

I don’t just mean the referendum itself, which was bound to create short-term volatility and weakness in the pound as the exchange rate adjusted to the uncertainty. What I am talking about is the irresponsible infighting in Westminster, both in Parliament and the Cabinet. Plainly, Brexit presents both risks and opportunities, but we cannot mitigate the risks or take the opportunities, and markets and businesses cannot adjust, if we do not know what sort of Brexit we are going to have or when we are going to have it.

On the one hand we have the extreme Remainers, evidently delighting in their ability to trip up the Government. Like Lenin, they believe “the worse, the better.” On the other, we have extreme Brexiteers, seemingly incapable of conceding that Brexit contains any sort of risks whatsoever. In the middle sit Number 10 and the Treasury, so paralysed by the process that they are apparently incapable of undertaking any meaningful economic reform.

As a consequence, whatever your point of view, there is an undeniable opportunity cost to Brexit of deferred economic growth as business decisions are delayed. Like the voters, international investors watch the spectacle of Westminster with increasing alarm. A recent survey of fund managers found that the FTSE 100 – which has underperformed other developed markets in recent years – was the least attractive global asset class.

The shunning of UK-quoted companies is also reflected in the foreign direct investment numbers, published by the OECD last week, which showed a dramatic 90 per cent drop in investment in the UK to only £15.1bn last year.

It does not need to be like this. We should be exploiting low interest rates and our deep capital markets to finance an investment boom and, like it or loathe it, Brexit should be a catalyst for urgent economic reform. Sadly, those squabbling in Westminster either do not know what damage they are doing or do know and don’t care.

George Trefgarne is founder of Boscobel & Partners, a communications firm.