What's Been Catching Our Eye

The Post-Brexit World?

John Shepperd – Butler Toll Economics Adviser
Two views on how the economy might look post-Brexit – one from the Treasury and one from the Bank of England. Both long and detailed – each over 80 pages – and both out on the same day. Clearly no coincidence. The focus of each is very different: The Treasury takes a 15-year view, the BoE a short-term view out to 2023.
The problem with the Treasury view is obvious – it is a well-worn cliché that economists have trouble forecasting the next year let alone anything like a 15-year view. A cliché, but one with a large element of truth about it.
Furthermore, what the Treasury is doing (as is the BoE) is comparing two hypotheticals: what the world might have looked like if we stayed in the EU, and how it might look under various circumstances post-Brexit. So a comparison of two “unknowns”. The differences are put in absolute amounts in figures of billions of pounds.
I would suggest the absolute size of the effects is not very meaningful, given the uncertainties over such a long time horizon. What it does do, however, is give an ordinal ranking of outcomes.
All potential outcomes are worse than if we had stayed in the EU, but some are worse than others.
In many ways the ordinal rankings reflect common sense: the closer any trade deal mimics having stayed in the EU the negative economic impact is diminished.
The worst case is a no-deal outcome. There are various options in between, depending on the type of trade deal that may be stuck. The least harmful is, of course, what the Government currently proposes.
The BoE’s short-term view is a result of its Financial Stability Review, so looking at various possible “scenarios” post-Brexit. In many ways similar results to the Treasury. All outcomes worse than having stayed in the EU, with how much worse depending on the type of trade deal stuck and what sort of “economic partnership” results. In most cases, some sort of trade deal is judged to have a relatively small potential impact.
What obviously catches the eye is the scenario based on no deal. So no transition period and an immediate crashing out in the spring of next year.
There are two variants of this – “disruptive” and “disorderly”. Disruptive is the base case – even the best possible outcome under no deal is bound to be disruptive. Disorderly is if there is chaos at the ports and a large reaction in financial markets.
If disorderly, as the media have highlighted, the short-term consequences could be an 8% (trough from peak) hit to GDP, house prices down 30%, commercial property prices down 48%, sterling down 25%, inflation up to 6½% and bank rate at 5½%. As the BoE highlights, across-the-board this would be worse than the results of the financial crisis.
The BoE’s defence of the apocalyptic view is that it is not a forecast. It is a possible scenario which may be a “worst case” designed to see whether the UK financial system could cope. But we may be close to splitting hairs here. Even if this is only scenario planning, then it obviously makes sense to base your scenario on a realistic expectation of what might indeed happen. Yes a worst case, but one which the BoE must think is a possibility.
In which case, the BoE is open to the accusation that it is pulling numbers out of the air. There is no forecasting model in the world that can cope with this sort of shock. And a degree of spurious accuracy. Commercial property prices down 48%? Not 50%? Or indeed why not 40% or 60%? Who knows?
What do we conclude? That from a purely economic perspective Brexit is a bad idea. How bad depends on how close a trade relationship with the EU we can negotiate. And that a no-deal outcome would be bad news, possibly very bad news. You might wonder whether we needed nearly 200 pages of detailed economic analysis to come up with this view.

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