Taking the opportunity of the recent UK autumn statement which is the first budget statement after the referendum to leave the EU. The forecasts stem mostly from the Office for Budget Responsibility and they were more pessimistic on the short to medium term prospects of the UK economy. Although the OBR only made modest adjustments, the earlier objectives of reaching fiscal balance and even a surplus and reduce government debt have been scrapped by the new government.
The biggest long-term consequence of the financial crisis is that the UK is much poorer than expected. The UK economy is a fifth or a sixth smaller than might have been expected before the crisis. Today the UK economy 10% GDP lower than before the crisis. Brexit, with stagnating productivity, adds a small additional shock which is estimated at 2% of GDP.
Normally, an economy will work its way out of a crisis through productivity growth. Britain’s productivity – always rather poor – was catching up until 2007 but since the crisis it comes close to 0. What is likely to happen then:
Revenue and spending prospects are worsening
Significant worsening of fiscal position
More borrowing which will lead net debt to reach a level of over 90% of GDP by the end of the decade.
As the new government cannot hit the targets, it has abolished former targets to allow much higher debt and much higher borrowing. Public finances are over GDP 100 bio worse off over the next 5 years. The government has already announced borrowing additional GDP 23 Billion.
With Brexit, the single most likely outcome will be a hard Brexit. The difficulty to reach an agreement with so many partners, 27 countries, the Commission, the parliament where some but not all decisions need unanimity will require substantially more time than anticipated. The UK will find itself outside the EU, outside the Customs Union, without a free trade agreement with the EU i.e. trading on World Trade Organization’s rules, which are not really clear. This will be very disruptive and the UK is unlikely to know wehre it is in 2020. The final economic fallout will be not known for many years and a wide range of uncertainty will remain.
Markets do like undcertainty. In light of lower economic growth, higher debt, the currency is likely to bear the brunt of higher expected inflation.
These are all good reasons the head for greener pastures.
Zurich, December 2nd , 2016