Brexit is more likely to be a horror show than a happy ending, especially with a Bank of England rate hike
David Brown says amid political squabbling and companies threatening to move jobs out of the UK, an interest rate hike would be totally inappropriate
Let’s be quite clear about this. Brexit is no magical mystery tour for Britain heading into a brand new, bright and breezy future outside Europe. As the Brexit row deepens, Britain seems hell-bent on heading into a national political, economic and social disaster. All the signs are pointing to Britain being stripped of its prestige hallmarks as a successful, modern industrial state. It is fast becoming a backwater of political failure, economic ruination and social decay.
Who would want to be in UK Prime Minister Theresa May’s shoes? She has an unenviable task on her hands, negotiating the impossible and meeting the baffling challenge of leading Britain into an easy way out of Europe. She is not so much walking a tightrope between intractable “remain” and “leave” rebels in her own government, but walking the plank into political oblivion. By all accounts, Brussels is already preparing for a hard Brexit. The outlook could hardly be bleaker.
The main worry is that nobody has any real clue what Brexit means for the future. Britain is simply heading into dark uncertainty, where all cosy notions about growth, trade, government finances and international relations have been blown out of the water. There are no economic models that can safely tell us what happens next.
Brexit might have a happy ending, but chances are it will be a horror show, given the present political squabbling. Britain’s three main Brexit progenitors – trade secretary Liam Fox, foreign secretary Boris Johnson and Brexit secretary David Davies – seem all at sea over the best way to exit Europe while inflicting the least damage on the nation’s future prosperity. Instead of a consensus, there is massive infighting and rampant speculation about Davies’ threats to resign.
This month, Britain’s leading car manufacturer Jaguar Land Rover announced its intention to switch production of its successful Discovery model to Slovakia. Last week, Europe’s Airbus threatened to pull out of UK aircraft production over fears of a “no deal” Brexit. And, in the past few days, Germany’s BMW and Siemens have joined the fray. The growing rush to the exit could turn into a stampede if a hard Brexit looks imminent, putting millions of UK jobs at risk.
Corporate warnings about hard Brexit pitfalls are less fearmongering than a dawning realisation of what could be looming in the worst-case scenario. The erosion of Britain’s industrial base, combined with large-scale job losses, will have a huge negative impact on future tax revenues at a time when Britain’s hard-pressed welfare state is slipping into deeper deficit. There will be little chance of escaping the grip of austerity without a massive U-turn in UK fiscal policy.
With the UK outlook so uncertain, it is no surprise that economic confidence is at a low ebb. Industry is reluctant to commit to new investment and consumer sentiment is running off the back foot, bringing the economy close to a nasty stall. Right now, it is very hard to spot any good news on the horizon. Households, industry and the City all seem to be sinking into a state of despair.
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Britain is already dropping down the global growth rankings and more critically falling behind its European competitors even before the Brexit axe falls. The UK economy needs as much help as it can get right now, but even the Bank of England is squaring up for its first post-crash interest rate hike in August. Given the current dire state of the UK economy, a rate tightening is akin to Emperor Nero fiddling while Rome burns. It is entirely inappropriate.
The shock of a hard Brexit could tip Britain into decades of deep-lasting stagflationary slump. In the long run, the economy may never fully recover. Britain is in deep trouble and there are no miracle cures on hand.
David Brown is chief executive of New View Economics