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Why Brexit is the biggest obstacle to the UK avoiding a hard recession, by leading economists

Soaring inflation, the tax-burden at a 70-year peak and rising interest rates have left millions facing a cost-of-living crisis.

And while every G7 nation has been hit by the cost of Covid and Vladimir Putin’s invasion of Ukraine, the UK is also feeling the effects of Liz Truss’s 49-days in Downing Street and the economic cost of Brexit.

The Organisation of Economic Co-operation and Development (OECD) believes that the UK is will experience the lowest growth of any major world economy next year.

The Government’s own Office for Budget Responsibility is predicting Brexit will have a 4 per cent long term hit to economic growth, and the Bank of England is forecasting that we are only at the beginning of a two-year recession.

i spoke to a several leading economists to get their predictions for how the UK can claw its way out of the fiscal mess.

Eamonn Butler, director of the pro-free market Adam Smith Institute, believes we are in for a “long, hard recession”.

Andrew Harrop, general secretary of the left-leaning social democracy group the Fabian Society, is particularly downbeat about the prospects for the economy.

“The outlook for Britain’s economy in 2023 is terrible, with economic growth, wages, employment and investment all expected to fall, while taxes and interest rates rise” Harrop says.

“This isn’t just down to external factors like the Europe-wide energy crisis. Brexit, austerity and the lack of any coherent plan for growth mean it is the Conservative Government’s fault that the UK is at the bottom of the growth league table.”

Former Chancellor Kwasi Kwarteng (l) and former Prime Minister Liz Truss (r) sent the markets into a tailspin with their mini-budget (Photo: Oli Scarff/AFP)
Kwasi Kwarteng and former PM Liz Truss sent the markets into a tailspin with their mini-Budget (Photo: Oli Scarff/AFP)

In a different corner of the economic world, the message is equally gloomy. It appears the right and left wing economic think-tanks are on the same wavelength for once.

Connor MacDonald, head of economics at the conservative think-tank Policy Exchange, says 2023 “will likely be extremely difficult”, but adds that this is a “result of predominantly external factors”, and most obviously the trajectory of global energy prices and the war in Ukraine.

Peter Arnold, chief economist at EY UK, predicts a relatively mild recession for 2023, with the economy with the economy shrinking by around 0.3 per cent.

“However,” he adds, “the risks to this are to the downside. Indeed, the Bank of England and the OBR are notably predicting a much more severe downturn – although predicated on interest rates getting to over 5 per cent, while the EY Item Club view is that they will peak at around 4 per cent.”

To be clear, there are some reasons to be cheerful found in the OBR’s most recent assessments following the autumn statement from the current Chancellor Jeremy Hunt in November.

The OBR’s energy price forecasts make for a more pleasant read than the Bank of England, for example.

However, as MacDonald notes, another element of uncertainty is related to the rate at which households draw down savings. The OBR forecasts households will rely on savings for every day spending much more than they have done in recent years “which will further complicate forecasting the next few years”.

“What we do know for certain though,” says MacDonald, “is the next year will be extremely difficult both on the growth and inflation fronts. The differences are of degree.”

Butler believes that inflation, which dipped from 11.1 per cent to 10.7 per cent earlier this month, will fall further “quite quickly”. Some relief at least then.

However, Butler also has some bad news.

“Like the Federal Reserve, the Bank of England has substantially increased the money supply over many years, driving up asset prices for the rich and keeping zombie businesses (and zombie government programmes) alive,” he says.

“And now, too late, both institutions have slammed on the brakes, too hard. That can only mean a long, hard recession.”

UK inflation has hit 11.1 per cent, but economists are predicting a fall in 2023 (Photo: PA Graphics)
UK inflation has hit 11.1 per cent, but economists are predicting a fall in 2023 (Photo: PA Graphics)

So, in the search for some more encouraging news amid the gloom, we asked our panel of nine experts to focus on some positives, and, believe it or not, they found some.

While Stephen Millard, deputy director at the National Institute of Economic and Social Research, is expecting a sharp fall in the first three months of next year he does believe there will, at least, be “anaemic but positive growth for the rest of the year’ as “inflation starts to come down from April to between 5 and 6 per cent by the end of the year.

“Interest rates I expect to go up to 4.5 per cent by August and stay there to the end of the year” he adds.

Yael Selfin, chief economist at advisory firm KPMG UK, believes the recession may be “protracted”, but it will be mercifully shallow, thereby increasing the likelihood that fewer businesses will go to the wall than if the downturn morphed into a depression.

She is even talking about some version of a recovery in 2023.

“The recently announced fiscal consolidation largely only kicks in from 2024, which will give the economy some room to recover next year, although the Chancellor has no real fiscal room to offer further support if needed,” says Selfin.

“Inflation should ease significantly next year given the base effects from the war in Ukraine will likely be abating.”

Nimesh Shah, chief executive of Blick Rothenberg, agrees that world events are the key to whether or not we see some improvement next year.

“If global events ease,” he says, “the UK economy could recover much quicker and stronger than expected, but little is in the control of the UK government, given its recent policies and tone of the agenda it has set.

“Spending on public infrastructure remains strong, which will continue to keep the wheels turning on the UK economy, and there is a strong backbone in financial services that should give the UK a degree of resilience.”

While Shah and Selfin may be providing reasons to be cheerful, they do not ignore those to be downbeat, including the ongoing impact of higher energy prices and everyday items in the weekly shop.

In other words, inflation may slow, but prices won’t fall. They will just rise less quickly.

Maybe that’s why Christopher Snowdon, head of lifestyle economics and the free-market think-tank, the Institute of Economic Affairs, is struggling to find any reasons for cheer.

“It’s difficult to see any positives,” he says. “The Government has decided to continue the borrowing splurge until they get kicked out of office.

“There has been no real attempt to control inflation and no attempt to improve productivity or shrink the state. Workers and savers will pay the price.”

As for the biggest negative away from global events one word keeps cropping up.

Asked what the biggest negative impact on the economy has been, Shah says: “In one word – Brexit. Unlike other countries, the impact and constraints of Brexit are making any recovery and future growth prospects challenging.

“One of the biggest concerns facing businesses is labour shortages and the UK Government needs to introduce a programme to encourage the right migration to manage a tight labour market and lack of skills in certain sectors.”

But even as talk of the Government softening its stance on Brexit refuses to go away, we’re a long way off striking something akin to a Swiss-style deal with the European Union, and for most economists the politics behind a move that would allow freedom of movement and the re-adoption of many EU laws would be impossible to sell to Tory backbenchers.

“The UK made its position worse because of Brexit,” says Lukasz Krebel, economist at the New Economics Foundation. “As for a Swiss-style deal with the EU, it is in fact hundreds of bilateral deals struck over the decades. Switzerland pays into the EU budget, follows EU laws and is partially in the single market. The EU is not keen on another such set up, and it’s difficult politically for the Government.

“But the UK can and should improve links with the EU to undo at least parts of Brexit damage. Sorting out Northern Ireland Protocol would help.”

While many believe a softer Brexit deal would be one route to growth for the UK economy, it would be naive for fans of such a move to bank on it in 2023, or over the next few years.

Where the experts believe the UK sits among the global economic powerhouses

Stephen Millard, deputy director at the National Institute of Economic and Social Research

“Not a good one.”

Christopher Snowdon, head of lifestyle economics and the Institute of Economic Affairs

“The UK will still a force to be reckoned despite it all. Most G7 countries have made many of the same mistakes.”

Andrew Harrop, general secretary of the Fabian Society

“We’ve got to stop pretending we’re a superpower and focus on catching up some of the ground we’ve lost.”

Eamonn Butler, director of the Adam Smith Institute

“We are making our problems worse by our ability to control government spending that is too high and our dash to pay off debt by raising taxes at precisely the wrong point in the cycle.”

Nimesh Shah, chief executive of Blick Rothenberg

“The mini-Budget and what followed politically clearly left a negative impression of the UK on the world stage.”

Conner MacDonald, head of economics at Policy Exchange

“There is still a regard for many of the UK’s economic strengths, but there are some issues that remain particularly acute.”

Peter Arnold, chief economist at EY UK

“The UK remains one of the largest and most important global economies – home to many world-leading industries and companies.”

Lukasz Krebel, economist at the New Economics Foundation

“UK made its position worse by Brexit.”

Yael Selfin, chief economist at advisory firm KPMG UK

“The UK is a laggard on the international stage at the moment.”

So, what should the Government do to spur growth?

The IEA’s Snowdon is calling for a radical agenda of “massive deregulation”.

“Break the NHS into a thousand parts to allow competition, efficiency and, therefore, lower taxes,” he says. “End the triple lock. Legalise fracking and onshore wind farms.

“Raise interest rates to historically average levels and keep them there. Allow the housing market to crash.”

If Snowden’s prediction that the Tories are about to be “kicked out of office” turns out to be correct, then that’s an agenda Labour leader Keir Starmer will be steering well clear of.

As we face the losing more of our incomes to HMRC in 70-years from next April, Butler is a fan of tax cuts.

“It’s simple,” he says. “Anyone who is deep in debt needs to raise their income and cut their expenditure.

“The Government isn’t cutting expenditure, Whitehall numbers aren’t being cut, grossly inefficient institutions like the NHS are not being reformed.

“Instead, it is raising taxes. But high taxes kill growth. They make life much harder for new, small, and growing businesses, which are the engine of growth and job creation. “Trying to tax yourself into prosperity is like standing in a bucket and trying to pull yourself up by the handle.”

MacDonald also believes in tax cuts for business and investment, a streamlining of the planning system and investment in childcare.

He adds: “Over the horizon, I would also look at ways to encourage consolidation in the direct contributions pension market to unlock capital for productive investment.”

NIESR’s Millard is looking for the Government to “increase public investment” combined “with local initiatives to ensure levelling up continues”.

Meanwhile, the Fabian Society’s Harrop believes the government should approve and finance shovel-ready investment projects to get Britain building, from onshore wind to social housebuilding.

He adds: “Looking to the future it needs to negotiate a much closer economic partnership with the EU, increase spending on adult skills and support to get people with health problems back into work, and offer businesses the stability they need to invest.”

Of course, such a wide selection of economists is never going to agree on everything, but even though this selection includes those on the left, the right and in the middle, there is a remarkable consensus.

As the Adam Smith Institute’s Butler puts it: “We are likely to see just how much ruin there is.”

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