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How much has Brexit uncertainty slowed growth?

Summary:
While I did not think Brexit was a good idea, I also did not expect the vote to trigger a UK recession. Instead, I argued that it would slightly reduce the UK’s long run growth rate, and cited the steep fall in the pound as evidence for that claim. In my view, recessions in big diversified economies such as the UK are mostly caused by tight money, with supply shocks playing only a modest role. There have been occasional news stories about foreign investment in the UK being scaled back, partly due to worries over continued tariff-free access to the EU market. In addition, the Financial Times cites a study suggesting a pretty large hit to growth: According to a recent paper from the Centre for European Reform, the UK economy is already some 2.5 per cent smaller than

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While I did not think Brexit was a good idea, I also did not expect the vote to trigger a UK recession. Instead, I argued that it would slightly reduce the UK’s long run growth rate, and cited the steep fall in the pound as evidence for that claim. In my view, recessions in big diversified economies such as the UK are mostly caused by tight money, with supply shocks playing only a modest role.

There have been occasional news stories about foreign investment in the UK being scaled back, partly due to worries over continued tariff-free access to the EU market. In addition, the Financial Times cites a study suggesting a pretty large hit to growth:

According to a recent paper from the Centre for European Reform, the UK economy is already some 2.5 per cent smaller than it would have been if Britain had not decided on Brexit. The knock-on effect on the public finances is, it argues, £360m a week, almost exactly the sum that the fount of economic wisdom, Boris Johnson, promised would be available after Brexit. The figure is in line with other reasonable estimates. Philip Hammond, chancellor of exchequer, used to say that the British people “did not vote to be poorer”. But they did. Alas, it could get far worse.

The Centre for European Reform study they link to uses the following method:

Our estimate has grown slightly because UK growth underperformed that of our ‘doppelgänger UK’ –a group of countries whose economic characteristics match Britain’s (principally the US, Germany, and Luxembourg). As these countries did not hold a referendum in 2016, we can compare them to the UK to assess the cost of Brexit. The countries in the doppelgänger were selected by a computer program based upon the similarity of their economies to Britain’s.

And presents this graph:

How much has Brexit uncertainty slowed growth?I suspect the actual effect is much smaller, for several reasons.  First, growth in the US during 2017-18 benefited from the corporate tax cut and the revival of fracking.  Germany participated in the 2017 Eurozone recovery from recession, whereas the UK (having its own monetary policy) never suffered the Eurozone double-dip recession of 2011-13.  By 2017, Britain’s recovery was already basically complete.

Recent unemployment data for the UK certainly does not look like a nation in recession, indeed it closely tracks the US:

How much has Brexit uncertainty slowed growth?To summarize,  I agree that Brexit has slightly slowed growth, and I believe that it will continue doing so in the future.  But the total effect so far is probably closer to 0.5% than 2.5%, and will probably remain very modest in the years to come.  Still bad, but not a catastrophe.  Of course the future effects will depend on the precise form of Brexit (hard or soft), and also the post-Brexit immigration policy.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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