British economy sees off Brexit for another day

Calamity averted or calamity deferred? The official figures for UK gross domestic product in the third quarter appeared to vindicate Brexit supporters who have argued consistently that leaving the EU would inflict little or no damage on the economy.

The data showed that the British economy expanded by 0.5 per cent between July and September, the three months following the referendum, with the annual growth rate remaining steady at about 2 per cent. More good news for domestic output has arrived in the form of strong car production numbers for September and the announcement that Nissan will be keeping some production in the UK.

To conclude, however, that the economy will sail happily through Brexit would be premature. The damage done to prosperity was always likely to be more of a medium and long-term issue, as trade barriers and political uncertainty affect British industry and particularly the country’s comparative advantage in financial and other business services.

Five months before Article 50 is due to be invoked, it would be hubris to conclude that everything will be fine. It is worth pointing out, too, that some of the more pessimistic modelling of the effect of Brexit, including that from the UK Treasury, was predicated on the assumption of immediate notice of departure. Not only is the recent sharp fall in sterling and uncertainty about the future likely to affect consumption and investment in the medium term, but the rising risk of a “hard Brexit” increases the probability that Britain’s motors of growth and tax revenue will be substantially weakened.

Thursday’s healthy-looking numbers might also conceal some problems ahead over the next year or two. Investment plans tend to be made on a much longer timescale than three months, so any effect on capital spending from the Brexit vote will probably come down the line. Second, the fall in sterling may have given a boost to car exporters and pumped up the profits of British-based companies that make a lot of sales overseas. But a rise in import prices, especially of food, will cut sharply into the real incomes of households, as did the last big fall in sterling following the global financial crisis, and restrain consumer spending.

In the longer term, the hard Brexit envisaged in some circles of government risks damaging the financial and supporting business services sector in which the UK is so competitive.

In theory, the fall in sterling will make other industry sectors, such as manufacturing, better able to penetrate world markets, and so spread economic activity more evenly around the country. But even assuming that manufacturing does respond, a fall in overall living standards — which will hit poorer households harder, thanks to the higher proportion of their income spent on imported food — seems a high price to pay.

In the short term, the momentum in the economy suggests that policymakers, including the chancellor in his Autumn Statement on November 23, can afford to watch and wait rather than leaping in with fresh stimulus. The Bank of England, too, which promptly and correctly reacted to the Brexit vote over the summer, could be forgiven for holding fire when it meets next month.

Thursday’s data show there is little immediate cause for alarm about the UK economy. That is to be welcomed. Yet years before Brexit actually happens — and six months or more before negotiations even begin — is a premature juncture at which to be making definitive judgments on the economy. The biggest effect will most likely be felt in the years ahead.

Letter in response to this editorial:

Growth since the Brexit vote should not surprise / From Jonathan Price