Martin Wolf - Advantage Austria€¦ · Martin Wolf Associate Editor, ... 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 GROWTH OF LABOUR PRODUCTIVITY PER HOUR (previous

Martin WolfAssociate Editor, Financial Times

Britain’s Future – What

Difference Might Brexit Make?Martin Wolf, Associate Editor & Chief Economics

Commentator, Financial Times

Austria Connect UK 2017

3rd November 2017

45 Princes Gate, Exhibition Road, London

Britain’s Future

• State of the economy

• State of negotiations

• Economic outcomes

• Political outcomes

• Conclusions

2

1. State of the economy

3

DIVERGENCE AMONG ADVANCED ECONOMIES


4

SUCCESS ON JOBS

0

2

4

6

8

10

12

14

1.1.00 1.1.02 1.1.04 1.1.06 1.1.08 1.1.10 1.1.12 1.1.14 1.1.16

UNEMPLOYMENT RATES

US Germany France Italy UK Eurozone


5

AND FAILURE OF PRODUCTIVITY

60

65

70

75

80

85

90

95

100

105

Q1-1990 Q1-1993 Q1-1996 Q1-1999 Q1-2002 Q1-2005 Q1-2008 Q1-2011 Q1-2014 Q1-2017

UK OUTPUT PER WORKER


6

-1,0%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

8,0%

1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014

GROWTH OF LABOUR PRODUCTIVITY PER HOUR(previous ten years, fitted trend)(source: Conference Board)

France Germany Italy United Kingdom United States

DECLINING PRODUCTIVITY GROWTH


7

LOSS OF EXTERNAL BALANCE

-8

-6

-4

-2

0

2

4

2.1.55 2.1.60 2.1.65 2.1.70 2.1.75 2.1.80 2.1.85 2.1.90 2.1.95 2.1.00 2.1.05 2.1.10 2.1.15

UK CURRENT ACCOUNT BALANCE (over GDP, %)


8

STERLING FALLS AGAIN

90

95

100

105

110

115

120

125

130

135

140

REAL EFFECTIVE EXCHANGE RATE OF STERLING(JP Morgan)


9

WILL INFLATION STAY LOW OR EXPLODE

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

4,0

Jän.05 Jän.07 Jän.09 Jän.11 Jän.13 Jän.15 Jän.17

CORE CONSUMER PRICE INFLATION (excluding energy, food, alcohol and tobacco)(per cent)

US UK Eurozone


10

BUT INFLATION SURGES

0

0,5

1

1,5

2

2,5

3

Jän.16 Apr.16 Jul.16 Okt.16 Jän.17 Apr.17 Jul.17

SUCCESSIVE CONSENSUS FORECASTS FOR UK CPI INFLATION

2017 2018


11

EXAGGERATED PESSIMISM

0,0

0,5

1,0

1,5

2,0

2,5

3,0

Jän.15 Mai.15 Sep.15 Jän.16 Mai.16 Sep.16 Jän.17 Mai.17

SUCCESSIVE CONSENSUS FORECASTS FOR UK GDP GROWTH

2016 2017 2018

2. State of negotiations

• The negotiations have three main components:

– The divorce: money; people; and Ireland

– Post-March 2019 transition: customs union; single market; and movement of people

– Post-Brexit long-term arrangement

• Obstacles to reaching a deal:

– Article 50, plus British incompetence, means little time is left

– In fact, the deal must be reached in less than a year

– The EU is a ponderous negotiator, with many other priorities

– The EU insists on agreeing the divorce first

12


– The UK does not yet know what it wants, has a weak government and divided main

parties

– The UK’s Brexiters regard compromises as treason and want to blame failure on the

EU’s unreasonable approach

– EU hardliners want to punish the UK, pour encourager les autres

• In sum, negotiations are not progressing very well

• The UK needs to understand it is the weaker party:

– In 2015, 44 per cent of UK exports of goods and services went to the EU. But only

7 per cent of EU exports of goods (including EU internal trade) went to the UK

13


• Here are some possible outcomes:

– No deal. The UK at ground zero for trade policy, confronting an administrative and

policy mess. 40% chance. Disaster.

– A deal on divorce:

• With a transition that includes membership of the customs union and single market,

but less integration than that in the longer term (details to be negotiated). 40%.

• With membership of the European Economic Area and the Customs Union, for the

indefinite future. 10%.

• With nothing else. (So not enough for the UK to pay up.) 5%.

– Exit from Brexit. 5%.

14

1. Economic outcomes

15

IMMIGRATION WILL SLOW

23 24 3350 62

79 76 742144 35

3440

5139

7

14

9 8

11

28

5463

46

199

215185 145

156

200193

179

0

50

100

150

200

250

300

350

400

YE Mar 10 YE Mar 11 YE Mar 12 YE Mar 13 YE Mar 14 YE Mar 15 YE Mar16p

YE Mar17p

NET IMMIGRATION INTO THE UK (100,000s)

EU15 EU8 Other EU Non-European Union


16

THE EU MADE THE UK FAR MORE OPEN


17

-32,0%

-20,0%

3,2% 3,0%

-26,0% -26,0%

0,0% 0,0%

-30,0%

-22,0%

2,2% 2,6%

-35,0%

-30,0%

-25,0%

-20,0%

-15,0%

-10,0%

-5,0%

0,0%

5,0%

Single market to WTOrules with EU

Single market to EU FTA WTO rules to BRIICSFTA

WTO rules to Anglo FTAs

CHANGE IN TOTAL UK TRADE AFTER LEAVING EU (Source: Ebell, NIESR)

Goods Services Total

IMPACT ON TRADE OF LEAVING THE EU


18

-9,0%

-8,0%

-7,0%

-6,0%

-5,0%

-4,0%

-3,0%

-2,0%

-1,0%

0,0%

OECD LSE/CEP HM Treasury NIESR

IMPACT ON GDP OF LEAVING THE EU(with move to a free trade arrangement with the EU)

2020 2030

POSSIBLE ECONOMIC COSTS TO THE UK

4. Political outcomes

• Brexit has inevitably destabilised UK politics:

– It has caused deep divisions inside both main parties

– It has undermined the credibility and authority of the Conservatives

– It has, almost by default, increased the electability of Jeremy Corbyn

– It has destabilised the Good Friday Agreement framework for peace in Ireland

– It has altered the dynamics of Scottish independence, by increasing both the likely

costs of independence and the potential benefits. This makes any referendum more

fraught

19

4. Conclusion

• The UK economy is doing well on employment and extremely badly

on productivity

• Brexit is an additional concern. It will make the UK poorer.

• Trade deals with the rest of the world not offset a loss of market access

to the EU

• Plausible assumptions for future economic growth (on trend) are

somewhere between 1 and 2 per cent a year. This depends mainly

on productivity trends

• The UK’s political future has become quite uncertain

20

Martin Wolf - Advantage Austria€¦ · Martin Wolf Associate Editor, ... 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014 GROWTH OF LABOUR PRODUCTIVITY PER HOUR (previous

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