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BoE official says Brexit productivity penalty is £1,000 per household
Back in the UK, a Bank of England policy maker has warned that a wave of business investment was “stopped in its tracks” by the Brexit vote nearly seven years ago.
Jonathan Haskel, an external member of the Bank’s Monetary Policy Committee, said an interview with The Overshoot that business investment had “basically flattened out” after the 2016 referendum.
That drop in business investment growth, the Bank has calculated, has created a productivity penalty of about 1.3% of GDP.
This is based on what would have happened if investment carried on growing at the pre-referendum rate.
Haskel explained to the Overshoot:
That 1.3% of GDP is about £29 billion, or roughly £1000 per household.
At the end of the forecast period, the penalty goes up to something like 2.8% of GDP, which is very close to the 3.2% number we found using the totally different reduced form methodology based on goods trade volumes.
This is a timely point, after The Observer reported that a cross-party summit bringing together leading leavers and remainers has been held, to try to address and remedy the failings of Brexit.
This has prompted Lord Frost, the UK’s former chief Brexit negotiator, to urge ministers to “fully and enthusiastically embrace the advantages of Brexit”. Frost claims the meeting is part of a plot to unravel the deal he negotiated.
Haskel, though, insists that the UK’s productivity slowdown “goes back to Brexit”.
Asked why the UK has had a more severe productivity slowdown than other countries since the financial crisis, he says this is partly due to the country’s large financial sector.
But, Haskel adds:
If you look in the period up to 2016, it’s true that we had a bigger slowdown in productivity up to 2016, but we had a lot of investment.
We had a big boom between 2012-ish to 2016. But then investment just plateaued from 2016, and we dropped to the bottom of G7 countries.
Haskel also suggests that delays in the NHS are responsible for the rise in economic inactivity, as more people leave the labour force.
He says:
There are basically two competing hypotheses here in the U.K. One is that actually lots of people have just retired. They were not active before and they’ve decided to give it up and just retire. Um, that’s hypothesis one. Hypothesis two is, is related to ill health.
The National Health Service here has had very long waiting lists. It’s proved to be very, very difficult for a very overstretched health service to deal with Covid and deal with the aftermath. We are finding some weak correlations between regional increases in inactivity and regional increases in self-reported ill health within the U.K.
You can read the full interview here:
France’s economy is forecast to grow by 0.6% this year, a slowdown on the 2.6% growth racked up in 2022.
Today’s EC Winter Forecasts says the easing of inflation pressures will help the French economy:
The French economy is projected to keep gaining traction until the end of 2024 as energy and food inflation moderate, and core inflation progressively declines.
This gradual acceleration is expected to be driven by domestic demand, with a mostly preserved household purchasing power over the forecast horizon resulting from government measures, dynamic wages, and a very favourable labour market.
This chart, from the EC’s Winter Forecasts, shows how gas consumption fell last autumn, helping to boost gas storage levels:
The EC fears that Germany, Europe’s largest economy, will contract at the start of this year.
The Winter Forecasts say:
Despite a recent improvement in confidence, the [German] economy is expected to suffer another mild decline in early 2023 as energy prices for households are still increasing and government support for January and February will only be disbursed in March.
Meanwhile export growth is set to slow down dragged by weak foreign demand.
For 2023 as a whole, Germany’s economy is only expected to grow by 0.2%, one of the weakest performance expected – but rather better than the 0.6% contraction forecast three months ago.
In 2022, today’s report says, Germany’s GDP rose by 1.8%, helped by the reopening of the economy after Covid-19 restrictions. But it shrank by 0.2% in the October-December quarter.
Although the outlook for Europe is better than expected, this doesn’t mean it is “positive” overall, commissioner Paolo Gentolini adds.
He points out that today’s new Winter Forecasts still show growth below 1% this year [at 0.8% in the EU and 0.9% in the euro area].
Inflation is still expected to be quite high [6.4% in the EU this year, and 5.6% in the eurozone].
Commissioner Paulo Gentolini is now taking questions about today’s winter forecasts.
Q: What is the main threat to these forecasts, and what impact will the increase in interest rates by the European Central Bank have?
The main risk comes from geopolitical tensions, and the evolution of the Ukraine war, Genolini explains.
The EC hopes that developments in the war will have a “positive influence” on the forecasts, but this is not easy to predict now, Gentolini says.
The coming winter could be difficult for energy, he suggests, adding that Europe has already shown in recent months that it can tackle challenges together.
It’s possible that measures, such as the common buying of gas, are more effective than expected, he suggests.
The tightening of monetary policy by the European Central Bank will have an impact on the economy, he adds, but will also have a very positive effect by reducing inflation.
At the start of February, the ECB raised interest rates by 0.5%, taking its key rate to 2.5%, the highest since 2008.
The threat of gas shortages appears less serious than a few months ago, but can still not be dismissed, today’s Winter Forecasts warn.
The EC says that the gas crisis has eased, thanks to alternative supply sources being found, the rise in gas storage levels, increased energy efficiency, and the drop in fas prices.
But, it warns that geopolitical tensions could drive has prices up again, while China’s reopening could lead to higher demand for gas.
That could make it harder to refill gas storage in time for next winter, the report says:
Refilling of gas shortages ahead of the winter of 2023-2024 may therefore pose more challenges than expected in this forecast.
Ireland expected to lead recovery with 4.9% growth
Ireland is expected to be the fastest-growing EU member this year, today’s Winter Forecasts show.
Ireland’s GDP is forecast to grow by 4.9% in 2023, stronger than the 3.2% forecast in the autumn forecasts three months ago.
Growth forecast for 2023 (%):
🇮🇪 4.9
🇲🇹 3.1
🇷🇴 2.5
🇱🇺 1.7
🇨🇾 1.6
🇸🇰 1.5
🇪🇸 1.4
🇧🇬 1.4
🇬🇷 1.2
🇭🇷 1.2
🇸🇮 1.0
🇵🇹 1.0
🇳🇱 0.9
🇧🇪 0.8
🇮🇹 0.8
🇪🇺 0.8
🇫🇷 0.6
🇭🇺 0.6
🇦🇹 0.5
🇵🇱 0.4
🇱🇹 0.3
🇩🇪 0.2
🇫🇮 0.2
🇨🇿 0.1
🇪🇪 0.1
🇱🇻 0.1
🇩🇰 0.1
🇸🇪 -0.8Winter #ECForecast ↓
— European Commission 🇪🇺 (@EU_Commission) February 13, 2023
Last year, Ireland’s economy is forecast to have grown by 12.2%, a strong performance, and falling inflation should help the economy this year, the EC says.
There isn’t, yet, any visible that job cuts in Big Tech have hit Ireland, today’s report says. But, there is uncertainty over how trade will develop, due to the implementation of the Northern Ireland protocol.
Here are the EC’s new forecasts, compared to last autumn’s forecasts three months ago.
Gentolini says the European economy has shown “remarkable resilience to the headwinds unleashed by Russia’s war of aggression in Ukraine”.
He tells reporters in Brussels that Europe achieved a “positive growth surprise” in the second half of last year.
The slowdown in the third quarter of 2022 was milder than expected, then the economy stagnated in Q4 rather than contracting by 0.5% as expected.
These are “quite outstanding outturns”, Gentolini says, given the pressures on Europe last year.
He adds that the estimated 3.5% growth achieved in 2022 is better than the US and China achieved (the UK, though, grew by 4%).
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