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Economics and Business

Economic Forecasts

Key Questions

How will our economy grow more quickly and create more jobs?

What will be the cost to us of generating extra growth?

Will our trade with the EU and the strength of the pound recover from the shock of the Referendum?

 

George Box said: “All models are wrong but some are useful”. In this context it is difficult to find which ones are useful.

What goes into a forecast governs what comes out and the assumptions behind the Government’s model have been based on past EU trade agreements that are not entirely relevant to us. Therefore although it is apparently arithmetically rigorous we wonder whether it is a good balance between the intellect and reality.

Exit has not produced any economic forecasts or even the assumptions on which it would base them. In our view they have to include:

  • How would they use the £13 billion contribution to the EU to deliver better value to the UK?
  • How would their immigration policies benefit the economy?
  • Which parts of the existing agreements are crucial to their forecasts and how would we benefit from them?
  • What could we earn from the service industries, particularly the City, since we are a service-based economy?
Government Forecasts

It seems to be generally accepted by both sides that the short term effects of the uncertainty following Exit will be painful.

The Government has published a number of reports showing the bad effects of Exit.  We are not convinced by them: The Chancellor treats them as statements when they are only mathematical models; their assumptions are much worse than any independent economist; we do not agree with their post-exit “model”; and their footnotes tell a different story from the headlines.

Treasury report on long term effects of Exit

“If we take as a central assumption that the UK would seek a negotiated bilateral agreement, like Canada has, the costs to Britain are clear. Based on the Treasury’s estimates, our GDP would be 6.2% lower, families would be £4,300 worse off and our tax receipts would  face an annual £36 billion black hole.”

The Comment “worse off” is applying to the level of GDP of the UK and it assumes no change in the number of households. It is not the same as income nor is it a measure of a family’s wealth.

Although the calculations are regarded as being very accurate, we do have some fundamental problems with a forecast for the next 15 years. If you think what has happened at any time in the last 15 years, it would not take much to totally undo many assumptions.

Treasury Report on short term effects of exit

“In this severe scenario, GDP would be 6% smaller, there would be a deeper recession, and the number of people made unemployed would rise by around 800,000 compared with a vote to remain. The hit to wages, inflation, house prices and borrowing would be larger.”
There have been many sceptical comments about this report even amongst its supporters. No other forecaster is predicting a recession anywhere near this amount and employment is generally expected to recover. It assumes that the Bank of England will do nothing to help the situation.
A vote to leave the EU could materially alter the outlook for output and inflation, and therefore the appropriate setting of monetary policy. Households could defer consumption and firms delay investment, lowering labour demand and causing unemployment to rise. At the same time, supply growth is likely to be lower over the forecast period, reflecting slower capital accumulation and the need to reallocate resources. Sterling is also likely to depreciate further, perhaps sharply.
Links
Independent forecasts

Independent economists have generally come down in favour of staying in the EU. In the short term it seems to be agreed that the uncertainty of the terms of exit will not be good for the £ or the economy. You can read their conclusions:

The FT did an interesting analysis of the models

PwC report for CBI

LSE Centre for Economic Performance

Open Europe

Property Academy

The numbers can come from various sources but here is a useful list:

Knoema has a very useful summary of several sources

The EU has its own forecasts

The OECD has worldwide forecasts

Economic Intelligence Unit is very thorough on the worldwide report

The Centre for European Reform analyses how the UK is intertwined with the EU

Global Counsel has done an interesting study of the other side: i.e. the effect on Europe of us leaving

IN

Companies will not invest in the UK

Our economy will slow down

There will be chaos in the markets

Sterling will not recover

The cost of living will rise

OUT

The UK is still an attractive place to do business

Exports to the EU are falling and will be replaced

A fall in sterling makes it easier for exporters

Link

Economists for Britain

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