Unlike conventional groupthink, the IoD predicts short-term pain but long-term gain as a liberalised economy benefits from Brexit, says James Sproule
Economic forecasts are fun – at least for the people making them, if not for those who rely on their accuracy. What many business leaders do not realise is that much of the forecasting is essentially an amalgam of well-informed prejudices with an appropriate dollop of data and circumspection, trying to see the world as it might be. The record of this approach is not looking good at the moment.
In the run-up to the European referendum, far too many economists succumbed to the groupthink anticipating that a vote for Brexit would immediately trigger a recession as consumer confidence, and with it spending (two-thirds of the economy), tumbled. The reality was very different. Those who voted to leave seem perfectly happy with their choice and even many who voted to remain are content to accept the democratic decision and get on with their lives (and spending). So a firm miss for the consensus there.
So to the next stage. As a result of getting this initial prediction wrong, many economists, ranging from the Bank of England to the EU Commission, have raised their UK forecasts for the next few years. But where others were pessimistic post-referendum and we at the IoD were more optimistic, we now find ourselves reversing position. The fall in sterling has probably given the UK expansion a stay of execution, but the present growth started in 2010 and at some point a retrenchment becomes almost inevitable. Rising interest rates (which we support) and rising inflation will erode spending power, along with at least the possibility of rising taxes and sluggish business investment, all combining to suggest the near-term forecast is likely to prove overly optimistic. No one is predicting robust growth, but we are more pessimistic than many.
Long term, once again we break with the consensus that Brexit is a cause for pessimism. Much of this stems from the fear the UK will suffer as a result of being slowly excluded from EU markets. That has to be a possibility, but there are two countervailing factors.
The first is that the UK can progressively liberalise in a way that the EU has found so difficult. The benefits of economic liberalisation are difficult to quantify, but history shows them to be real and potentially substantial. Secondly, the world is becoming ever more entrepreneurial, and many EU member states are regrettably languishing in this brave new world. Our view is that long-term economic success is going to be more dependent on agility – which UK businesses do demonstrate – than productivity, where it performs less well. Economic forecasting is always fraught, but we are more hopeful than fearful about the UK’s long-term prospects.
Our aim in the IoD Policy Unit is not to be contrarian for the sake of it, yet we are perfectly content to hold a minority view. Time will tell how the British economy develops in the coming years, but many a conventional economist forecast is on track to score 0/3.
James Sproule is the IoD’s chief economist and director of policy