This week, the first official GDP figures since the vote to leave the European Union were released by the Office for National Statistics. Although there was a slow down in the economic growth from 0.7% to 0.5%, the figures were stronger than some pessimistic economists had predicted. Professor Diane Coyle uses a Brexit lens to analyse what we can tell from the new figures, and what we can’t.
- The welcome news about the economy in the short term does not mean there will be no adverse long-term consequences of Brexit
- The sharp drop in the pound’s exchange rate will increasingly affect prices and therefore living standards
- The Government must have promised Nissan compensation if there turns out to be new costs of exporting from the UK to the rest of the EU post-Brexit, putting tax payers on the hook for future compensation
This week’s preliminary official figures for the third quarter of this year (July-September) showed a steady pace of economic growth in the UK. The annual rate of growth in GDP has been around the long-term average for about two years now. The biggest boost in the most recent months came from the ‘transport, storage and communication’ sector, growing at its fastest rate since late 2009; this was mainly due to film, video and TV programme production, sound recording and music publishing activities, and computer programming industries. Less encouragingly, output fell in all categories of the economy outside the service sector: agriculture, construction and production were all down on the previous three months.
Those are the figures, but everybody wants to know what they mean in relation to Brexit. The answer is still – as it will remain for some months to come – not much. Brexit has not happened and nobody, perhaps not even the Prime Minister, knows what it means.
Of course, it is a relief that the direst pre-referendum warnings about the implications of a Leave vote for the economy have not materialised – although a one-fifth reduction in the nation’s purchasing power due to a sharp drop in the pound’s exchange rate is bad enough. That will increasingly start to affect prices and therefore living standards as the higher costs of imported items are passed on to consumers. We already had the ‘Marmite’ tussle between Unilever and Tesco about which company would bear the higher costs of those imported items. Microsoft has raised its prices for some business customers.
For most purchases, it takes up to six months for cost increases to work through to consumers. As a lot of businesses put up prices in January, economists will be watching those figures – published in February – closely. Energy and food price increases will probably be particularly prominent.
The other relief was Nissan’s announcement that it will commit to producing two new models of car in the UK. It employs thousands of people, with more in the supply chain, so it would have been a huge blow if the company had withheld its investment. The government has not said what promises it made in the letter from minister Greg Clark, but Nissan’s chief executive, Carlos Ghosn, had been clear it would need compensating for any increase in costs due to Brexit. The letter must therefore offer compensation if there turns out to be new costs of exporting from the UK to the rest of the EU post-Brexit, and with enough clarity to have convinced hard-headed Nissan executives and lawyers. All other car manufacturers, and indeed any other businesses thinking about relocating to another European country, will now be forming an orderly queue at the Department for Business, Energy and Industrial Strategyto ask for the same promise.
However, the welcome steady-as-she-goes news about the economy in the short term does not mean there will be no adverse long-term consequences of Brexit. Leaving the EU without putting in place the ability of UK firms in both manufacturing and services to continue to do business with their existing trading partners would be extremely damaging to the economy. There is still no clarity at all about whether the Government will decide it is worth paying a high economic price in order to have tough controls on EU migration, as the Cabinet is effectively rowing in public about exactly this choice.
If the Government is indeed making promises to firms like Nissan to keep them investing in the UK, they are putting tax payers on the hook for future compensation if the trade deal does not work out. Some banks and other financial businesses are going ahead with their relocations anyway, buying space in Frankfurt or Dublin, and will announce them in 2017 when everything is in place to make the move. Tech companies, universities, and other manufacturers involved in pan-European supply chains are extremely anxious about their ability to hire skilled people and retain access to markets and funds.
So steady economic growth so far is good news, but we should not count on it lasting for the next two or more years it will take to find out what Brexit does in fact mean.