Buoyant UK economy sets off battle on likely Brexit impact

Patrick Minford takes great pleasure in the British economy's buoyancy since the UK voted to leave the EU – which he contends has steeled the country's resolve to follow through with Brexit. Prof Minford, a one-time adviser to former prime minister Margaret Thatcher and who has become one of the most prominent economists in the Brexit camp, focuses with particular zeal on the inaccuracy of the pro-EU side's predictions that a vote to leave would hammer confidence.

Such pessimistic views were once widespread, but last week Andy Haldane, the Bank of England’s chief economist, admitted that his own prophecies of an immediate post-vote downturn were misjudged.

For Prof Minford, the failure of his opponents’ forecasts is vital in the fight over how the UK leaves the EU and what sort of future relationship it will build with the bloc. “They are hoping slower growth will turn public opinion against Brexit,” he says. “If these guys were right, we’d be seeing it by now.”

In the run-up to the referendum, economics was the Remain campaign’s favoured weapon. As Leavers appealed to British hearts with the promise of regaining sovereignty and “taking back control”, George Osborne, then the chancellor, countered with warnings about the hit to growth and public finances.

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Detractors dubbed this “project fear” – although they worried themselves about an immediate hit to confidence in the wake of a vote to leave – but there has been no such shock to the economy since the June referendum. Bolstered by unexpectedly strong consumer spending, the country is now on track for roughly 2 per cent growth in 2016.

“There’s no doubt that economic activity has held up better than most economists thought,” concedes Simon Tilford of the pro-EU Centre for European Reform think-tank conceded. Mr Tilford notes that not all pro-EU economists missed the mark and – like many – remains convinced that the Brexit pain will eventually arrive. He worries however that the smooth sailing in the meantime could create a false sense of confidence and shift public support toward a more extreme form of EU exit.

“The fact that growth has held up over the last six months is a negative because it has emboldened the Eurosceptics and those who think that the UK can flourish outside the single market,” he says.

For now, the stream of good economic news shows little sign of drying up. Mark Carney, the Bank of England governor, told MPs on Wednesday that Brexit was no longer the biggest domestic risk to Britain’s financial stability. Hours earlier, the Office for National Statistics announced that industrial production had grown faster than expected in November.

When Remainers cite the weak pound, which has fallen more than 17 per cent against the dollar since June, Leavers point to the soaring stock market – partly fuelled by companies with earnings in foreign currencies – and splashy London investments unveiled in recent months by the likes of Google and Facebook.

The ultimate consequences of Brexit are still not known. The government of prime minister Theresa May is due to trigger the two-year-long divorce process in March.

The vast majority of the 120 economists surveyed by the FT at the end of 2016 still believe Brexit will harm the UK's longer-term economic prospects. Mr Haldane has insisted that the Bank of England's gloomy outlook was still justified, describing the forecasting problem as "more a question of timing than of a fundamental reassessment of the fortunes of the economy".

Some economists believe Brexit will begin to bite later this year as the weak pound pushes up prices for imports and inflation creeps up. That would make consumers feel poorer, particularly if inflation outstrips a modest recovery in wages that has been under way.

As it becomes clearer that Ms May is heading for a “hard” Brexit, the feared flight of businesses to the continent and the safety of the single market may also gather pace – but Prof Minford remains upbeat. He sees growth accelerating this year to 2.5 per cent or more, with a tight labour market leading to a pick-up in wages that exceeds inflation, and highlights hopes that eventually Britain will be freed from EU protectionism.

He argues that in the longer term any resulting tariffs will be more than offset by the weak pound. “This is a huge stimulus to the economy,” he said. “For the next five years or so, [British] manufacturing is going to have a good time in world markets.– Copyright Financial Times Service 2017