Reading the minutes of the Monetary Policy Committee (MPC) and the associated policy summary isn’t everybody’s cup of tea. But the document issued yesterday is only 12 pages long and written in plain English with relatively little jargon. And, with its references to Brexit, it is well worth reading.
Somewhat less user-friendly is the Bank of England’s monthly Monetary Policy Report for November. At 49 pages, it presents more of a challenge, although it still manages to be remarkably free of the dense jargon that might be expected in such documents.
Taken together, though, the documents have important things to say about Brexit, giving an insight into the state of play and the thinking of the Bank of England (BoE) on the issue.
Starting with a statement of the obvious, we are told that, in October, the UK and EU agreed a Withdrawal Agreement and Political Declaration, the UK House of Commons approved the second reading of the Bill that translates the agreement into law, and the UK and EU agreed a flexible extension of Article 50.
Thus, sterling has appreciated markedly as the perceived probability of a no-deal Brexit has reduced and, says the MPC, “These developments are also likely to remove some of the uncertainty that has been facing businesses and households”.
Moving on, we are then told that the MPC’s projections are now conditioned on the assumption that the UK moves to a deep free trade agreement with the EU, although it is admitted that “some uncertainty is likely to persist”. This is because the details of the UK and EU’s eventual relationship “are assumed to emerge only gradually over time and the smoothness of the transition to it remains to be determined”.
As for the current situation, the MPC now anticipates that GDP will emerge one percent lower by the end of 2022 than was projected in August. Three quarters of the difference is accounted for by moves in asset prices and the “weaker global environment”, but the remaining quarter is partly die to changes in Brexit assumptions, brought about by Johnson’s deal.
Nevertheless, UK GDP is expected to pick up during 2020 “as the dampening effects from Brexit-related uncertainties begin to dissipate”, boosting business investment growth. From one percent growth in the fourth quarter (Q4) of 2019, the MCP expects to see 1.6 percent in the 2020 Q4, 1.8 percent in 2021 Q4 and 2.1 percent in 2022 Q4.
This, however, assumes an improvement in global growth and progress on Brexit, and in particular the future trading arrangements with the EU. But, as Mark Carney, BoE governor, acknowledged yesterday, “both are assumed in the MPC’s latest projections; neither is assured”.
In fact, says the BoE in a separate report, “some uncertainty is likely to persist”. Brexit, it observes “is a process rather than a single event” and, while the agreement sets out the broad parameters of the UK and EU’s future trading relationship, the range of potential outcomes is still relatively wide.
If there were prizes for understatement, this report would surely be on the short-list, as the chances of securing a stable, long-term trading relationship with the EU in the near future seem slight. And as long as Johnson insists on concluding a deal by next year, without extending the transition period, the chances are next to nil.
On the other hand, if Corbyn takes the prize of No 10 residency, there is absolutely no knowing what will happen. On the face of it, he will try to renegotiate the withdrawal agreement, and claims he will be able to wrap up Brexit within six months. Very few people, though, would have confidence in that estimate.
Either way, therefore, with nothing really resolved, one might expect little in the way of a reduction in uncertainty. And – in the event of Johnson renewing his lease on No 10 – if by the end of June he has not extended the transition period, adding the full two years allowable, we cannot rule out a collapse in business confidence.
Then, come the end of 2020, as we are precipitated into what will amount to a no-deal scenario, the most likely outcome is a deep and prolonged recession, with predictable effects on the private sector and public finances.
With that hanging over us, therefore, it does seem rather unwise for both main parties to commit to ambitious public spending promises, fuelled by massive increases in borrowing – in what seems to be an unrestrained bidding war.
Those of us schooled in traditional economics are more used the idea of governments building up reserves in the good times, to help cope with the demands on public finances that recessions bring, at times when tax revenues fall.
For sure, under Keynesian economics, governments are encouraged to spend during recessions, and Sajid Javid’s promise of a £300 billion investment spree could be just what is needed to keep economic activity buoyant when exports collapse as a result of our failure to agree a trade deal with the EU.
However, when shadow chancellor John McDonnell promises an even larger £150 billion “social transformation fund” over the next five years, on top of £250 billion for investment in green infrastructure over 10 years, and renationalisations which are expected to cost nearly £200 billion, one begins to wonder if we are inhabiting the same planet as the politicians.
Javid, for instance, is assuming that he can keep borrowing at today’s low interest rates, ignoring any future inflationary effects from a botched Brexit – such as the plummeting value if the pound and the soaring costs of imports. And that is without taking account of the fragile global economy which could slip into recession at any time.
Despite that risk, Chancellor Javid assumes that the UK GDP will continue to grow, thus allowing debt to fall as a proportion of GDP. However, he promises to cap borrowing if debt interest payments rise beyond their historic share of GDP. But, on that basis, where the economy is in recession, his spending promises would never be realised.
Since much of this new investment would be directed at infrastructure projects, there are also serious questions about the ability to deliver at short notice. For instance, with construction projects the shortage of skilled labour – made up in the recent past by immigration from EU Member States – would be a major constraint.
The worst of it all, though, is that that politicians seem to be either ignoring Brexit or assuming that it will have no harmful effects on the economy that they need to take into account. To that extent, they really do seem to be occupying their own fantasy worlds which bear very little relation to possible post-Brexit scenarios.
In fact, once again – with day two of the election campaign over – Brexit seems to have disappeared from the front pages of the print media. Personality politics have even displaced news of the spending war, with several papers featuring as their lead items, the decision by “Labour veterans” to support the Tories.
A more sanguine media would, of course, be homing in on the soft optimism of the MPC report, warning that the uncertainty incumbent in the unrealistic Brexit policies of both main parties has not improved our overall position.
Together with a deteriorating global economy – and some very worrying economic news coming out of the eurozone – there is a far stronger risk of recession than is being allowed for. The BoE’s growth projections could be completely off-beam, with the real-world situation rendering ambitious spending promises so much hot air.