Do Gloomy IMF Forecasts Prove Brexit Was a Mistake? - Anonymous Banker

Brexit Myths Debunked (Volume I)

I have a friend whose economic and financial analysis is always interesting because it is apolitical. He is a former City economist with decades of experience. Unfortunately, like many people who have something genuinely valuable to add to the conversation, he prefers to protect his privacy in our turbulent political and cultural landscape. But I’ve always found his explanations and insights useful and I think you will as well. That’s why he’ll be contributing to my Substack from time to time as the Anonymous Banker.

This piece is part of a series of upcoming articles which attempt to provide an objective, data-based look at the economic impact of Brexit on the UK and debunk the myths peddled by both sides of the debate.  

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A glance at the headlines on Brexit will leave the reader in no doubt that Brexit has been an ‘economic disaster’. This is the official high-status opinion and the matter is settled. Read no further if you want to retain your confidence in this view and your position as a member of the informed elite. But, if you want a nuanced appraisal of what’s really happening on Brexit Island in purely economic terms that may challenge your prior beliefs… read on.

Am I going to argue Brexit is going tremendously well and the economy is great? No. Because, spoiler alert, it really isn’t! However, a weak economy post Brexit and Brexit causing these economic ills are not the same thing.

My aim here is to inform and debunk media myths, not to argue for Leave or Remain.

The intention is to examine Brexit in purely economic and financial terms, as this reflects my background, and attempt, as far as possible on such on emotive topic, to be objective and data driven. Clearly, Brexit should not be considered in purely economic terms (as it often seems to be in our media). A criticism I have of Brexiteers, and therefore an area of common ground I hold with Remainers, is the diplomatic and social cost of Brexit. Strong and warm relations with your nearest neighbours strike me as something that all countries should strive for, and by choosing to leave the club we have some making up to do in my view.

Brexit has become an area that is ripe for confirmation bias – politicians, analysts and economists cherry picking data to suit their side of the argument. Any negative economic data point is attributed to Brexit regardless of whether it truly should be – e.g. fuel shortages, food shortages and so on.

The irony of many of these stories, pushed by Remain- and EU-friendly outlets, is their inward looking and parochial nature. Brexiteers are caricatured as insular Little Englanders with no interest in the rest of the world but it is Brexit critics who avoid looking honestly at conditions in Europe and in the wider world and notice that many of the issues that bedevil us here are present there too.

It’s entirely reasonable to ask whether sectoral labour shortages (hospitality, fruit picking, lorry drivers) in the UK are a result of Brexit. Our current tepid economic environment has come immediately post Brexit – surely the two are related?

Chinese Premier Zhou Enlai was once asked what impact the French Revolution had been and replied: “It’s too soon to say”. Brexit, I’m afraid, is rather similar.

To look at the issue objectively, over the next few articles we’ll consider the major macroeconomic forces we actually care about – Economic Growth, Wages, Inflation and Unemployment. We’ll take a separate look at post-Brexit trade deals as well.

1.       Economic Growth

The UK media (along with the New York Times) has consistently described the UK economy as a basket case since the events of June 2016. Dismal IMF forecasts announced last week seem to support this claim.

So how has the UK performed in terms of economic growth compared to our major European peers since 2016?

The UK has averaged real GDP growth of 1.4% over this period of ‘Brexit chaos’. This isn’t exactly tigerish growth. However, everything is understood in comparison. Were the UK media to look over the channel, they would see that the EU has struggled too. The chart below shows that the UK has actually performed better than its key European peers in terms of real GDP growth since 2016, which will surprise many UK readers.

Source: IMF World Economic Outlook Database.

In other words, rather than being the Sick Man of Europe, Britain is coping with the economic malaise affecting the entire continent better than most.

The IMF recently released its revised forecasts for global economic growth. They made grim reading for the Brexiteers and the notion of Global Britain. I find it hard to disagree with their prognosis – yes Brexiteers and Jeremy Hunt are right to point out that the IMF’s forecasting record is very poor, but I struggle to see plausible reasons why UK growth in 2023 will not be disappointing. Inept government, high taxation, rising interest rates to tackle high inflation together with little room for manoeuvre given our high debt load makes for a thoroughly unappetising economic cocktail.

As the media has reported, the IMF expect the UK to be the only major (G7) economy that suffers a contraction in growth this year.

Source: IMF World Economic Outlook, January 2023.

This has naturally been seized upon by Brexit opponents as proof positive of the folly of Brexit. Whilst I would agree that the UK being the only G7 nation to suffer this reverse looks, prima facie, to be evidence of a problem unique to the UK, I would suggest the following needs to be borne in mind before we declare Brexit a failure on the basis of these statistics.

Firstly, was Brexit declared a roaring success in 2022 when the UK enjoyed the highest growth in the G7 at 4.1%, as the table above highlights?

Secondly, the key economy in the EU, Germany, is expected by the IMF to achieve growth of 0.1% of 2023, essentially flat. The risks to this number are likely to be to the downside given the impact of the war in Ukraine on the German economy. If I look at the average forecast for the German economy in 2023 by economists from the world’s major investment banks and economic forecasting groups (the likes of Goldman Sachs, UBS, Credit Suisse, Deutsche Bank, S&P, Oxford Economics), Germany is expected to suffer a recession in 2023, declining -0.4% (the same measure for the UK predicts a deeper recession of -0.9%).

It is also important not to focus on a single year in isolation in this sort of analysis (e.g. declaring Brexit a success based on 2022). If one takes the IMF forecasts above and looks at the average across 2022-24, a more complete picture emerges.

Source: IMF World Economic Outlook, January 2023.

Looking at the data over this time frame shows that UK growth is expected to be in line with the US, France and Japan, and ahead of Germany. However, we cannot avoid the fact that the UK is expected to be the slowest growth economy in 2023 and 2024 (this is reflected in the forecasts of the major investment banks also, so let’s accept this as the consensus view of the rest of the world about our near term economic prospects).

The IMF provides economic forecasts out to 2027. These are updated bi-annually in April and October[1]. Examining their projections from 2025-27, we find that they forecast the UK (jointly with Canada) to enjoy the highest annual average growth rate of any G7 nation. Forecasting this far out is likely to be a complete waste of research time – economists can’t forecast well over 12 months never mind 60 months. Nevertheless, it does indicate that independent and dispassionate forecasters without a dog in the fight do not foresee a long-term economic decline of Brexit Britain, despite what the UK press might suggest.

Source: IMF World Economic Outlook Database, October 2022.

Curiously, one of the IMF’s main concerns about the UK economy which caused them to lower their outlook for GDP in 2023 was ‘tighter fiscal and monetary policies’. This would be the same IMF that recently took the rare step of criticising a G7 member’s budget when commenting on Liz Truss’ decision to loosen fiscal policy to stimulate the economy. Are they coming round to Trussonomics after all?

Stay tuned for Brexit Myths Debunked Volume II which will be published in the next couple of days.

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[1] Given the IMF slashed its near-term forecasts in January for the UK (as well as those for most major nations in 2024), it would be logical to expect these numbers to be cut in the April revision. The point is that beyond 2024, these forecasters do not anticipate some sort of long term decline of UK plc, relative to its peers.