"The government has lost its majority. The constitution has fallen apart. The country no longer has any idea whether it is leaving the European Union or not. Historians and political commentators are queuing up to tell us this is the lowest point in the country’s history since the Suez Crisis/Civil War/Dissolution of the Monasteries (delete as applicable).
And yet, amid all this chaos and confusion, something else is happening. The economy, slightly surprisingly, is purring along quite smoothly. The explanation? In truth, the EU doesn’t make much difference to the economy anymore. And insofar as it does, leaving is a marginal improvement.
The City expected the economic data released this week to make grim reading. Global trade is slowing, with central banks in the US and the eurozone cutting rates to try and stave off recession. Add in a slowdown in investment as companies understandably fret about our potentially chaotic departure from the EU and the British economy should be slowing down sharply.
Except that is not quite what happened. First, we learnt that the economy overall expanded by 0.3 per cent in July, significantly faster than the 0.1 per cent expected, and better than most of our main rivals. Next, we found out that the trade deficit narrowed slightly as imports fell. Finally, we learned that employment was at record highs and that wages were still growing at record rates. Add in a Chancellor who is about to start spending money with carefree abandon and there is no reason why it shouldn’t improve from here. It isn’t fantastic. But it is a decent performance from a mature economy facing what is meant to be its biggest economic challenge in a generation.
In fact, there are two explanations for that. The first and simplest is that membership of the EU, and all the political drama around it, doesn’t make a lot of difference to business one way or another. They have made their preparations and can live with either outcome. Sure, there might be some disruption around no deal if that is what happens. But demographics, demand, skills, tax rates and levels of entrepreneurship, innovation and infrastructure are what actually determine growth. Membership of a big – but not terribly successful – trade bloc isn’t that crucial one way or another.
Next, at the margin, our looming departure is a slight improvement. You can see that most clearly in the employment and wage data. As the amount of cheap eastern and central European labour has started to fall, employers have had to pay their people a bit more. As the research consultancy High Frequency Economics noted in an analysis of the figures: ‘We believe we are seeing a change in the composition of the workforce as the economy loses foreign workers, largely in low wage jobs’. Much as the textbooks would suggest, with a lower supply of cheap labour companies are starting to restructure so that they use fewer people and pay the ones they have a little more. Sure, some companies that are completely dependent on low paid labour will suffer. But on balance that will be an improvement, especially as those higher wages will soon translate into higher spending, creating more growth.
In truth, the drama around Brexit may be a political earthquake. But to the economy, it is already largely an irrelevance. And on balance, it is turning into a positive." - Matthew Lyn