It has been a year since a narrow majority of British voters voted in favour of Brexit. The result has triggered a never-ending debate about its economic and political effects. How do things stand one year later? Last week, Agelos Delis presented some figures in The Conversation (see here).
It turns out that the UK did relatively well in terms of GDP growth during the second half of 2016 – or, rather, what we call ‘relatively well’ these days (see here for an historical overview of GDP growth). However, more recently, indications of a slowdown have become very clear (see here and here). For example, according to OECD figures, GDP growth in Q1 2017 was 1.1% in Korea (up from 0.5%), 0.9% in Canada (up from 0.7%), 0.6% in Germany (up from 0.4%), it was 0.6% in the EU (which remained unchanged). GDP growth slowed down in France (0.4% from 0.5%) and in Italy (also by 0.1%). But nowhere did it fall as much as in the UK. UK GDP currently (Q1 2017) growth stands at 0.2% (down from 0.7%).
The Pound has depreciated by ca. 15% since last year, as international markets reacted to the announcement and the chaos of the Brexit (see here). The depreciation of the pound means that British consumers have to pay much higher prices for foreign products. As a result, inflation increased from 0.5% in June 2016 to 1% in September and 2.9% in May 2017, the highest in four years. At the same time, average wages are falling. They have been dropping since the end of 2016. Average weekly wages (excluding bonuses) fell from £461 in June 2016 to £459 in December 2016 and £458 in April 2017 (see here).
As Delis explains, the drop in average wages could have serious consequences. Recent UK GDP growth was driven by consumer spending, but in the meantime household savings have been steadily depleted. If wages fall, the economy will slow further. The households savings ratio (showing how much households save as part of their income) was 5.2% in 2016: its lowest level since 1963.
The trade balance shows how bad things really are. The depreciation of the Pound should have led to an improvement in the trade balance. But this did not happen (as some, Ha-Joon Chang and Wren-Lewis for example, predicted). The UK’s trade deficit has risen by £5 billion since the referendum: although exports have risen by 12%, imports have risen by 12.7%. Normally, a depreciation reduces imports, increases exports and help to boost employment and wages. That this did not happen shows the abyss the UK is heading towards. The reason is the so-called productivity-puzzle. The productivity puzzle is far from a problem for the UK only (witness the ‘impressive’ GDP growth figures everywhere).
What is the so-called productivity puzzle? As Howard Davies explains, nine years after the financial breakdown, output per hour remains significantly lower than it would have been had the pre-2008 growth trend continued (see here). Output per hour in France was 14% lower in 2015 than it would have been had the previously normal trend growth rate been matched. Output was 9% lower in the United States and 8% lower in Germany (the ‘top performer’ among developed economies – but performer of what?). But as Davies shows, the UK is doing the worst of all. British productivity was 9% below the OECD average in 2007; by 2015, the gap had widened to 18%. UK productivity per hour is fully 35% below the German level and 30% below that of the US. The French could produce the average British worker’s output in a week and take Friday off (see here).
The fundamental question why this is happening has been given many answers. One explanation is that the UK’s more advanced (virulent) neoliberal mode of regulation led to more de-industrialisation and outsourcing than in continental Europe. Together with de-industrialisation, the ‘industrial commons,’ synergies between economic sectors and know-how disappeared. The parts which remained have been struggling ever since. They are not competitive. There is obvious truth in this explanation, although no one seems to know the weight of this factor. Owen Jones explained that the early Thatcher years were characterised by breaking the political power of the unions and the Labour strongholds (see here). For this reason, some of the industrial commons had to be destroyed, regardless of whether this made economic sense or not. The morbid right wing enthusiasm for these fateful policies even stunned some of the Chicago boys when they visited the great neoliberal paradise across the pond. One is supposed to have asked Thatcher what her plans were, after all a country cannot survive on golf courses alone (see here). But then, it was not golf courses that Thatcher had in mind, but financialisation. And it has been that ever since. In no other European country has economic growth been so geographically concentrated. For decades, most of the growth has gone to London and the South. Since the financial crisis, almost all growth has gone to London and the South (see here and here).
This answer also explains the “populist rebellion” (which fuelled the Brexit) (see here, here and here). As long as the disenfranchised (call them ‘the losers of globalization’ (Rodrik) although globalization was a minor part of it) were sufficiently enlightened to vote for parties that acted against their interests – the Tories or New Labour – no one said a word about their political masochism. It was functional and did not threaten anyone except themselves. It was only when they started to vote for political parties that act against their interests and constitute a danger to the political system that the liberals started to talk about the “rebellion” of the masses. They are basically too stupid to vote and constitute a danger to democracy. What do we need to do now?
The proposition that it has been the chronically failed policies of the traditional parties which created the ‘angry, proto-fascist masses’ cannot be expressed in such polite company. This responsibility is too much for the liberal worldview to contemplate. The fringe parties – which are admittedly decidedly ugly (no discussion here) – also created the political atmosphere in which the traditional parties could move even more to the right, while still giving the impression of being democratic, serious, decent, open, pluralist and all of that. The truth of the matter is that the disenfranchised stayed behind without any real political representation whatsoever. Some lost their jobs, their communities, their houses, their futures, their wages fell or they got entangled into the sadism of labour market activation. Whatever happened, they had no say in any matter because no one listened to them. This is not empty talk. If you want to know to which degree of utter disgusting and, politically speaking blind, contempt the political elite – Tories and New Labour and Corbyn Labour – treated and continues to treat these people, read this absolutely excellent article by Aditya Chakrabortty in the Guardian here.
A lot of other answers are being given to the productivity conundrum. According to Shiller (one of the latest contributions), productivity is down because consumption remains low and consumption is low because people are afraid of the coming (?) robotisation and automation that will threaten their jobs (see here). This perception might be a factor. Davies proposes another explanation. He writes that “It would seem that, in addition to the factors affecting all developed economies, the UK has particularly weak management” (see here). If it is weak management, what explains this weak management then? He continues by writing that:
“During the crisis and its immediate aftermath, when banks’ efforts to rebuild capital constrained new lending, ultra-low interest rates kept some firms’ heads above water, and their managers retained employees, despite making a relatively low return” (see here).
So it is not weak management only, but also ultra-low interests and managers retaining employees despite a profitability crisis. Davies explains that since the financial crisis, new and more productive firms found it hard to raise the capital they needed. So they either did not expand or did so by substituting labour for capital. What happened, according to Davies, was that low interest rates held productivity down by allowing heavily indebted companies to survive. The Bank of England has acknowledged the existence of this trade-off. It estimates that productivity would have been 1-3% higher in the UK had it raised interest rates to pre-crisis levels in the recovery phase. But the consequences – slower income growth and higher unemployment – would have been unacceptable (see here).
That wouldn’t have been a solution then, would it?
To conclude, economically speaking, the UK has done poorly since the referendum. GDP growth is down, it is now 0.4% lower than the EU average of 0.6%, which is a grotesque failure in itself. The Sterling has depreciated, but the country failed to take advantage of it. Imports became more expensive, inflation is rising, real wages are falling and household savings are at their lowest level since 1963. To these figures could be added a plethora of other negative effects. As Wren-Lewis says, there are no major economic pros that need to be compared with the cons. Instead there are just economic costs, and the debate is about how large these will be (see here).
In Part 2, I will deal with the political consequences of the Brexit. I will examine the leftwing case for the Brexit and criticise it. The (mainstream) leftwing case for the Brexit is part and parcel of what Flassbeck recently called “the European disease.” He made this comment after a discussion in Barcelona where he made the point that the democratic leftist forces in Europe need to stand up and work towards changing EU economic governance, which is impossible without tackling the German wage problem and the corresponding German political dominance in the union. But a representative of the (‘extreme’) left Podemos disagreed: ‘We have to solve our problems and you have to solve yours,’ he replied to Flassbeck.
That, indeed, is the European disease. The EU treaties are not set in stone. The EU institutions can be reformed. The Brexit did nothing to further this case – the contrary is true. Today, German dominance of the EU institutions and their dysfunctional macroeconomics is more outspoken than ever before. The only way forward is to set up a large, European wide, front against the current EU policies. Dropping out means nothing if you cannot articulate what you are dropping into. The peoples of Europe have to work together. We can have the EU institutions and use them to promote and implement rational and just policies – on the condition that we work together.