Michael Roberts

Brexit crisis looms

Michael Roberts

BRITAIN’S ECONOMIC PERFORMANCE will slow next year as the prospect of a ‘hard’ Brexit takes its toll on growth and confidence, the Organisation for Economic Co-operation and Development (OECD) predicted in a blow to UK Prime Minister Theresa May just one day before the General Election.

In its latest twice yearly global economic outlook, the Paris-based international organisation also called for more public borrowing and infrastructure investment.

The OECD has traditionally supported the policies of the government of the day, so its departure from the normal script is notable. It strongly backed the austerity policies of former UK Prime Minister David Cameron and then-Chancellor George Osborne between 2010 and 2015.

In its economic projections, the OECD followed other forecasters in revising up its forecasts for economic growth in 2017. But while the organisation upgraded many of its economic forecasts for other countries in 2018, it held the UK outlook constant at 1% growth. The OECD now expects Italy will be the only G7 leading economy to perform worse than the UK next year.

The gloomy outlook stems in part from the OECD’s assumption that the UK will leave the EU without a comprehensive freetrade agreement to replace the EU single market, and the expectation that the UK will trade on more restrictive World Trade Organisation terms from April 2019.

“The uncertainty, and the assumed outcome, is projected to undermine spending, in particular investment,” the OECD said. “Policies have supported private confidence and consumption, but household spending is projected to ease as the combination of a weakening labour market and higher inflation reduces real wage growth,” it added.

Catherine Mann, OECD chief economist, said recent economic data had been poor and the weak pound was unlikely to provide much of a relief for the British economy. “We are concerned about the purchasing power for consumers in an environment where pass through [of higher import prices to consumers] seems pretty robust,” she said. The OECD also noted that recent sterling depreciations had not stemmed the UK’s persistent decline in its share of global export markets. The organisation said the government should raise capital spending and not worry about balancing the books as a result. In The UK economy at a glance; a one-stop overview of the key UK economic data, including GDP, inflation and unemployment, the OECD declared, “Further fiscal initiatives to increase public investment should be considered to support demand in the near term and boost supply in the longer term.”

There is now a hung parliament. This is more than a disaster for May and the Conservatives. It is one for the British ruling class. It leaves the upcoming Brexit talks with the EU in a mess as there is no ‘strong and stable’ government to negotiate. The negotiations over the terms of Britain leaving the European Union were supposed to start on 19th June. Now, the EU negotiators will face British ones who have lost their majority in the British Parliament. The terms of any deal are going to be tough on the interests of British capital: on the terms of trade, employment mobility and on capital flows for the City of London.

The British pound dropped sharply after the election result and it is likely to fall further as foreign investors consider their options. Sterling has already fallen by over 15% since the Brexit referendum result last year.

The UK trade deficit with the rest of the world keeps widening as British exporters fail to take advantage of a weaker pound and import prices rise. The reason that British capital is not gaining from the devaluation of the currency is that British manufacturing and services are still not competitive because productivity growth is virtually zero. It's nine years since the start of the global financial crash in 2008. Since then, GDP per person in the major economies has risen on average at less than 1% a year. But the UK has managed just 2% increase in real GDP per person over nine years!

The main reason is the sharp fallback in the growth of the productivity of labour. The UK economy has depended instead for its (limited) growth since the end of the Great Recession on a consumer boom and a big increase in immigration of young people from Eastern Europe and the EU. According to the most recent ONS statistics, there has been no increase in the number of UK-born in employment over the last year. All the net increase in employment has been due to those born abroad. If the Brexit negotiations go ahead and the free movement of labour is lost, British business is going to have to use domestic labour and skills. Employment growth will slow and national output will falter unless productivity rises.

And the main reason for that is the failure of businesses to invest in productive capital i.e. new machinery, plant and computer software. Business investment has hardly risen since the Great Recession even as profitability has recovered.

That’s because profits were concentrated in the large companies while the small and medium sized companies made little and could not get credit. The large companies (mainly tech) returned their profits to shareholders in dividends and share buybacks or held cash abroad in tax havens, rather than invest. And business profits in the UK started to fall back even before the Brexit vote.

The UK economy is set to enter a period of stagnation at best. There is every likelihood of a new global recession in the next year or two. This minority Conservative government is going to find it difficult to survive for long. There could well be a new General Election before the year is out and that could lead to a Labour victory based on a reversal of the neo-liberal policies of the last 30 years. If the UK capitalist economy is in dire straits, a Labour government will face an immediate challenge to the implementation of its policies.

  • Michael Roberts blogs here.

works in the City of London as an economist.