Brexit uncertainty and Brexit itself
By Scott Sumner
Is it too early to evaluate the impact of Brexit? I’d say so, given that Brexit will not occur until at least 2019.
How about the impact of Brexit uncertainty, which just a few weeks ago many (most?) pundits were suggesting would push the UK into recession? It may be a bit too early, but there are some indications that the effects will be less than anticipated. Here’s Tim Worstall, discussing a recent PMI number that was quite bullish, after the scary number last month:
As to the why of this there are two parts to it. The first is obviously the manner in which we were all told that voting for Brexit would indeed mean the self-immolation of the British economy. Since we did vote for it, rightly so, one can imagine purchasing managers being a little hesitant given what they had been told. And then that doesn’t come to pass, they all cheer up a bit and the index is now actually higher than it was before the vote. Small storm in teacup, no one gets very wet sort of story therefore.
But there’s also a larger economic point to make:
After Brexit we have the Brebound and the currency effect. Companies in the manufacturing sector seem to be getting back to business and we are seeing order flows pick up from across the world as the devalued pound boosts the competitiveness of UK exported goods. This has driven the rate of growth to a 26 month high. There was a moderate in employment it seems but we believe that industry will hold off on a meaningful increase in employment until they are happy to call this a trend and not a blip.
Markets, pure unadorned markets, really do have correction mechanisms in them. So, imagine that the UK economy really was going to suffer from Brexit. What is then going to happen? Yup, that fall in predicted economic growth will lead to the pound falling against other currencies. This makes our exports cheaper, leading to Johnny Foreigner being interested in buying more of them. And thus this stimulates the domestic British economy and that threat of recession is reduced. As has actually happened.
The importance of this being something that we really do all need to remember. Markets really do work.
I half agree with Worstall. I think the pundit class at elite media outlets did overestimate the impact of uncertainty. On the other hand, events since late June have confirmed my worst fears—that Brexit was likely to push the UK in a more statist/nationalist direction. The UK already has a completely new government, which is more sympathetic to “industrial policy”, immigration curbs, restrictions on foreign investment, etc.
Tim’s half right about markets working—they work when they are allowed to work. What might stop markets from working?
1. Bad monetary policy. As Tim points out the BoE allowed the pound to fall after the Brexit vote, and that partially cushioned the blow, allowing markets to work. So I don’t think uncertainty can do much damage, as long as monetary policy keeps NGDP growing at a decent rate.
2. Bad trade/immigration policies. The UK has traditionally been a open economy, with lots of immigration in recent decades. I don’t think this will change dramatically, but I do believe they are moving slightly away from open markets and high rates of immigration, which will cause the UK trend rate of growth to slow after Brexit is finally adopted. There’s nothing monetary policy can do about slower trend growth.
The bottom line is that when discussing the impact of Brexit, always be clear about whether you are discussing the impact of Brexit itself, or the impact of uncertainty about a future Brexit.
I am scheduled to discuss Brexit later today on CNBC (although one never knows with these things.) I’ll try to provide a broadcast time if they give me one.