(Part two)
There are a number of problems with all these studies, including the sensitivity of the results to the choice of countries in the control group and the weights assigned to them. Successive iterations of the CER model have required some large changes in order to ensure a good fit. But the biggest weakness is the assumption that all the difference in the relative performance of the UK since 2016 is due to Brexit, rather than other unrelated factors affecting the UK or the control group.
In reality, there may be some very good reasons why the UK would have slipped down the growth league tables anyway, regardless of the outcome of the 2016 referendum. Much as I’d like to think otherwise, the UK isn’t normally the strongest economy in the G7, and some eurozone economies in particular were due a period of catch up.
What’s more, any international comparison is usually dominated by what has happened in the US, where the economy has recently benefited from a substantial fiscal boost under President Trump. In contrast, UK GDP has grown at roughly the same pace as Germany since 2016, and actually outperformed Germany over the last two years.
To be fair, John Springford at least has acknowledged this point. The latest (and final) CER report noted that excluding the US from the analysis reduced the estimated hit to UK GDP from 2.9% to 2.2%, while excluding Germany (and thus increasing the weight on the US) increased it to 3.4%. But that’s a substantial margin of error.
I therefore think it makes more sense to adopt a ‘bottom-up’ approach. There is no doubt that the UK economy has been held back since 2016 by Brexit uncertainty in two main ways. But again, most studies are too pessimistic.
One of these channels is the inflationary impact of the fall in the pound. For example, economists at the LSE have suggested that this has increased consumer prices by 2.9%, costing the average household £870 per year. There’s a lot of sophisticated analysis behind this, but in the end all they have done is take 0.29 (an estimate of the share of imports in UK consumer expenditure) and multiply it by 10% (an estimate of the fall in an import-weighted sterling exchange rate index).
In my opinion, this is at the upper end of what’s plausible. The study assumes that higher import costs are passed on in full to consumers and that they are unable to avoid them by switching to domestic goods and services. It also ignores other channels through which the fall in the exchange rate might have had a positive impact on the economy and on at least some households, including the boosts to competitiveness and asset prices. But my main objection is the assumption that the fall in the exchange rate is permanent.
URL:
https://capx.co/the-problem-with-the-big-cost-of-brexit-numbers/
