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Martin WolfAssociate Editor, Financial Times
Britain’s Future – What
Difference Might Brexit Make?Martin Wolf, Associate Editor & Chief Economics
Commentator, Financial Times
Austria Connect UK 2017
3rd November 2017
45 Princes Gate, Exhibition Road, London
Britain’s Future
• State of the economy
• State of negotiations
• Economic outcomes
• Political outcomes
• Conclusions
2
1. State of the economy
3
DIVERGENCE AMONG ADVANCED ECONOMIES
1. State of the economy
4
SUCCESS ON JOBS
0
2
4
6
8
10
12
14
1.1.00 1.1.02 1.1.04 1.1.06 1.1.08 1.1.10 1.1.12 1.1.14 1.1.16
UNEMPLOYMENT RATES
US Germany France Italy UK Eurozone
1. State of the economy
5
AND FAILURE OF PRODUCTIVITY
60
65
70
75
80
85
90
95
100
105
Q1-1990 Q1-1993 Q1-1996 Q1-1999 Q1-2002 Q1-2005 Q1-2008 Q1-2011 Q1-2014 Q1-2017
UK OUTPUT PER WORKER
1. State of the economy
6
-1,0%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
8,0%
1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
GROWTH OF LABOUR PRODUCTIVITY PER HOUR(previous ten years, fitted trend)(source: Conference Board)
France Germany Italy United Kingdom United States
DECLINING PRODUCTIVITY GROWTH
1. State of the economy
7
LOSS OF EXTERNAL BALANCE
-8
-6
-4
-2
0
2
4
2.1.55 2.1.60 2.1.65 2.1.70 2.1.75 2.1.80 2.1.85 2.1.90 2.1.95 2.1.00 2.1.05 2.1.10 2.1.15
UK CURRENT ACCOUNT BALANCE (over GDP, %)
1. State of the economy
8
STERLING FALLS AGAIN
90
95
100
105
110
115
120
125
130
135
140
REAL EFFECTIVE EXCHANGE RATE OF STERLING(JP Morgan)
1. State of the economy
9
WILL INFLATION STAY LOW OR EXPLODE
0,0
0,5
1,0
1,5
2,0
2,5
3,0
3,5
4,0
Jän.05 Jän.07 Jän.09 Jän.11 Jän.13 Jän.15 Jän.17
CORE CONSUMER PRICE INFLATION (excluding energy, food, alcohol and tobacco)(per cent)
US UK Eurozone
1. State of the economy
10
BUT INFLATION SURGES
0
0,5
1
1,5
2
2,5
3
Jän.16 Apr.16 Jul.16 Okt.16 Jän.17 Apr.17 Jul.17
SUCCESSIVE CONSENSUS FORECASTS FOR UK CPI INFLATION
2017 2018
1. State of the economy
11
EXAGGERATED PESSIMISM
0,0
0,5
1,0
1,5
2,0
2,5
3,0
Jän.15 Mai.15 Sep.15 Jän.16 Mai.16 Sep.16 Jän.17 Mai.17
SUCCESSIVE CONSENSUS FORECASTS FOR UK GDP GROWTH
2016 2017 2018
2. State of negotiations
• The negotiations have three main components:
– The divorce: money; people; and Ireland
– Post-March 2019 transition: customs union; single market; and movement of people
– Post-Brexit long-term arrangement
• Obstacles to reaching a deal:
– Article 50, plus British incompetence, means little time is left
– In fact, the deal must be reached in less than a year
– The EU is a ponderous negotiator, with many other priorities
– The EU insists on agreeing the divorce first
12
2. State of negotiations
– The UK does not yet know what it wants, has a weak government and divided main
parties
– The UK’s Brexiters regard compromises as treason and want to blame failure on the
EU’s unreasonable approach
– EU hardliners want to punish the UK, pour encourager les autres
• In sum, negotiations are not progressing very well
• The UK needs to understand it is the weaker party:
– In 2015, 44 per cent of UK exports of goods and services went to the EU. But only
7 per cent of EU exports of goods (including EU internal trade) went to the UK
13
2. State of negotiations
• Here are some possible outcomes:
– No deal. The UK at ground zero for trade policy, confronting an administrative and
policy mess. 40% chance. Disaster.
– A deal on divorce:
• With a transition that includes membership of the customs union and single market,
but less integration than that in the longer term (details to be negotiated). 40%.
• With membership of the European Economic Area and the Customs Union, for the
indefinite future. 10%.
• With nothing else. (So not enough for the UK to pay up.) 5%.
– Exit from Brexit. 5%.
14
1. Economic outcomes
15
IMMIGRATION WILL SLOW
23 24 3350 62
79 76 742144 35
3440
5139
7
14
9 8
11
28
5463
46
199
215185 145
156
200193
179
0
50
100
150
200
250
300
350
400
YE Mar 10 YE Mar 11 YE Mar 12 YE Mar 13 YE Mar 14 YE Mar 15 YE Mar16p
YE Mar17p
NET IMMIGRATION INTO THE UK (100,000s)
EU15 EU8 Other EU Non-European Union
3. Economic outcomes
16
THE EU MADE THE UK FAR MORE OPEN
3. Economic outcomes
17
-32,0%
-20,0%
3,2% 3,0%
-26,0% -26,0%
0,0% 0,0%
-30,0%
-22,0%
2,2% 2,6%
-35,0%
-30,0%
-25,0%
-20,0%
-15,0%
-10,0%
-5,0%
0,0%
5,0%
Single market to WTOrules with EU
Single market to EU FTA WTO rules to BRIICSFTA
WTO rules to Anglo FTAs
CHANGE IN TOTAL UK TRADE AFTER LEAVING EU (Source: Ebell, NIESR)
Goods Services Total
IMPACT ON TRADE OF LEAVING THE EU
3. Economic outcomes
18
-9,0%
-8,0%
-7,0%
-6,0%
-5,0%
-4,0%
-3,0%
-2,0%
-1,0%
0,0%
OECD LSE/CEP HM Treasury NIESR
IMPACT ON GDP OF LEAVING THE EU(with move to a free trade arrangement with the EU)
2020 2030
POSSIBLE ECONOMIC COSTS TO THE UK
4. Political outcomes
• Brexit has inevitably destabilised UK politics:
– It has caused deep divisions inside both main parties
– It has undermined the credibility and authority of the Conservatives
– It has, almost by default, increased the electability of Jeremy Corbyn
– It has destabilised the Good Friday Agreement framework for peace in Ireland
– It has altered the dynamics of Scottish independence, by increasing both the likely
costs of independence and the potential benefits. This makes any referendum more
fraught
19
4. Conclusion
• The UK economy is doing well on employment and extremely badly
on productivity
• Brexit is an additional concern. It will make the UK poorer.
• Trade deals with the rest of the world not offset a loss of market access
to the EU
• Plausible assumptions for future economic growth (on trend) are
somewhere between 1 and 2 per cent a year. This depends mainly
on productivity trends
• The UK’s political future has become quite uncertain
20