Why did the British economy do OK after Brexit?

by on January 7, 2017 at 12:55 pm in Economics, Uncategorized | Permalink

One argument is “the higher trade barriers haven’t kicked in yet.”  Another is “the decline in the value of sterling shows the British people already have taken big wealth losses.”  Another approach focuses on consumption, Chris Giles at the FT has some good insights:

…rather than rising, household savings fell throughout 2016. The savings ratio dropped to an exceptionally low level in the third quarter as consumers went on a borrowing and spending binge not seen since before the financial crisis.

The interesting question is why households acted in this way. There are three plausible reasons. First, households correctly thought Brexit would improve their personal finances and borrowed and spent accordingly. Second, they were deceived into expecting economic gains from Brexit and still went out to spend. And, third, households watched sterling tumble, understood the likely effect on prices and brought forward their consumption, so they were spending in the knowledge their money would buy less in future.

Economic analysis allows us to set out these possibilities; it tells us only the last of the three options is sustainable; but it does not yet inform us which is correct.

By the end of 2017, we will know whether historically low levels of saving have persisted through the year, and this will provide a pretty good answer to the question of why spending held up so well after the EU referendum. If spending was merely brought forward, there will be a nasty jolt in the economy.

Here are some figures for consumer credit.  Do stay tuned…

1 inertial January 7, 2017 at 12:58 pm

So, the next recession in UK, no matter when it occurs, will be declared the result of Brexit.

2 Justin Kelly January 7, 2017 at 1:08 pm

+1

3 M January 7, 2017 at 2:12 pm

Heads, economist consensus wins, tails, economist consensus wins.

4 Lanigram January 7, 2017 at 2:55 pm

+1 Do economists study behavioral economics? Do they read Kahneman?

5 Troll me January 7, 2017 at 4:05 pm

So long as they do not discuss Brexit as something influencing the post-Brexit situation, analysis should be pretty much on the ball.

6 TMC January 8, 2017 at 11:24 am

Isn’t that the whole point of Brexit, to influence the future?

7 Art Deco January 7, 2017 at 1:05 pm

Why did the British economy do OK after Brexit?

Because in context (WTO &c), the welfare benefits of EU membership are small and cancelled out by the effects of the Brussels hydrocephalus. The EU isn’t about gains from trade. It’s about stripping working people with their vernacular sentiments loyalties of any influence over the societies in which they live. Very attractive idea to the sort of person who thinks it’s an affront to tenured civil servants in North Carolina for a state department to have more than a dozen or so discretionary appointees.

8 mulp January 7, 2017 at 1:24 pm

But nothing has changed in reality in regard to costs/benefits of being in the EU. How can that balance be known until Brexit actually happens?

You are arguing that jumping out of a plane with no parachute causes no harm as you fall.

9 Art Deco January 7, 2017 at 2:35 pm

How can that balance be known until Brexit actually happens?

The same way you’d differentiate the effects of Brexit from other influences: modeling and statistical analysis.

10 carlospln January 7, 2017 at 4:31 pm

Losing Euro clearing alone will cost the UK 83,000 jobs

http://www.afr.com/business/banking-and-finance/london-could-lose-83000-euro-clearing-jobs-in-brexit-negotiations-report-says-20161114-gspbf3

1) That’s material

2) Since absolutely nothing has happened, yet, no one should be surprised that nothing has happened. Yet.

11 Art Deco January 7, 2017 at 9:51 pm

Losing Euro clearing alone will cost the UK 83,000 jobs

You’ve quoted a magazine article which says ‘could lose’. Neither the source nor the characterization is something a non-determined person would take at all seriously.

12 carlospln January 8, 2017 at 2:19 am

Artie, your beloved gnomes of Brussels have already promised that this will be the 1st part of City business to be ‘right-shored’

Frankfurt, Ho!

😉

13 Art Deco January 8, 2017 at 12:54 pm

So what? Frankfurt’s about the size of Baltimore.

14 Lanigram January 7, 2017 at 3:08 pm

I think I agree, though I don’t understand your closing sentence. Would you clarify?

If the leavers knew the consequences of Brexit would hurt their financial status but voted for Brexit anyway, that would indicate how much more they value local political control and autonomy over EU welfare benefits, trade, and cross border movement.

Personally, I think the remainers loud and agressive cajoling of the leavers demonstrated a profound ignorance of a basic human need for personal sovereignty and autonomy.

15 Art Deco January 7, 2017 at 3:33 pm

I think I agree, though I don’t understand your closing sentence. Would you clarify?

Reference to the moderators’ recent remarks on discretionary appointments in North Carolina. “The first sounds like a good change, as in general the professional bureaucracy in American politics should be more powerful, as it is in Western Europe. “

16 Lanigram January 7, 2017 at 3:40 pm

Thank you.

A powerful professional bureaucracy seems antithetical to the fundamental principals of the US.

17 Ronan(rf) January 7, 2017 at 1:05 pm

Because brexit hasn’t yet happened ?

18 collin January 7, 2017 at 2:04 pm

+1….I don’t think most economist thought Brexit would lead to economic downfall but more slowdown. So why nothing much has changed because:
1) Actual Brexit policy has yet to happen.
2) Other aspects of the economy were strong enough to cover up this slowdown. (Think the 2012 US budget fight and cuts. It probably did have an impact on 2012 GDP but other aspects overcame it.)

19 Matthew Moore January 7, 2017 at 2:36 pm

The economic consensus was an immediate mild recession after the vote

20 Lanigram January 7, 2017 at 3:11 pm

How about this: the leavers sentiment turned positive? That is one possible narrative.

21 M January 7, 2017 at 2:14 pm

“We’d be right if we hadn’t predicted this one political choice wrong… Obviously, no other choices, political or other, could intervene and spoil our predictions”.

22 Ben January 7, 2017 at 1:16 pm

Or, politics, news and exchange rates plays a lot less of a role in people’s lives as economists like to think.

I find it highly unlikely that anyone is really thinking ‘our currency just fell 15% against the dollar, quick! Let’s quickly buy loads of imported goods”, there are all sorts of studies that show how out of touch with inflation expectations the public are. Instead, what’s happening is the currency devaluation could be boosting domestic spending over other things like holidays (which are, all else equal, a drag on growth). For example, UK skiing bookings in Europe were down 10% this winter: https://www.bloomberg.com/news/articles/2016-11-02/brexit-keeps-brits-off-europe-s-ski-slopes-as-pound-drop-bites

But even then, I think the effect is minimal, UK GDP growth hasn’t really changed since Brexit because the vast majority of consumers don’t change their spending habits based on future possible expectations (that most certainly aren’t certain), they base their decisions on what’s happening now. Since wage growth hasn’t stalled and unemployment remains low, and asset and stock prices remain high, consumers aren’t changing anything.

Saying that the British public thought that it would make them better off certainly doesn’t make sense either as Remain won on the economy, the result was super close and if turnout was 100%, the outcome would’ve almost certainly been Remain due to young people not voting. So that would have virtually no effect either.

23 Ralph January 7, 2017 at 1:18 pm

All these suggestions are basically “our prediction was wrong, let’s find a cause that let’s us avoid having to admit that the assumptions they made their predictions on were wrong.” The real explanation is that Brexit will be good for the British economy, allowing it to avoid EU trade barriers.

“There are three plausible reasons. First, households correctly thought Brexit would improve their personal finances and borrowed and spent accordingly. Second, they were deceived into expecting economic gains from Brexit and still went out to spend. And, third, households watched sterling tumble, understood the likely effect on prices and brought forward their consumption, so they were spending in the knowledge their money would buy less in future.”

The first two reasons are just wrong. 48% of the voters voted to remain, I’d bet all of them expected a negative effect of brexit. Some leave voters probably expected it too, that’s what all the “experts” said. They voted Leave anyway, for nationalist reasons or because they thought getting off the sinking ship immediately was worth temporary economic dislocation. The third explanation is more plausible, but I think unlikely. Prices, if anything, got more expensive. If prices suddenly get more expensive, do you expect ordinary people to go out and buy MORE because, hey, the prices might go up even more?

I think the real effect is because lots of people on the Right were pessimistic before the referendum, believing the white race was doomed to extinction. Now, they are optimistic and see less need to save lots of money.

24 Ralph January 7, 2017 at 1:22 pm

Consumers and investors are two different kinds of people, who spend in different ways. So the question “why isn’t investment down” is quite different from “why isn’t consumption down.” To clarify my comment, I think investors haven’t lowered investment because just as many of them see a positive effect of Brexit, for their businesses at least, as a negative one. Don’t forget that devaluing currency helps exporters. For consumers, the explanation, is, as I said, a reduced pessimism.

25 Lanigram January 7, 2017 at 3:21 pm

Ralph,

“…people on the Right were pessimistic before the referendum, believing the white race was doomed to extinction. Now, they are optimistic and see less need to save lots of money.”

Nice, but evil, setup for your parting backhand.

26 Justin Kelly January 7, 2017 at 1:18 pm

> .. households CORRECTLY THOUGHT Brexit would improve their personal finances and borrowed and spent accordingly. Second, they WERE DECEIVED into expecting economic gains from Brexit ….

These qualifiers are unnecessary and may prompt incredulity in the reader. Economics is a very powerful analysis tool but economists need to remember to stay humble, less they damage the reputation of their science. The market might not be omniscient, but it is rational, so lets just keep it at that. Chances are if we don’t think the market is acting rationally, we probably need to look closer at the issue, and double check our own bias.

27 Lanigram January 7, 2017 at 3:28 pm

+1 “…check our own bias.”

28 carlospln January 7, 2017 at 4:34 pm

“but economists need to remember to stay humble, less they damage the reputation of their science”. [SNIP]

Justin’s naivety is beyond touching.

29 Leon January 9, 2017 at 12:40 am

I’m not sure how you would understand the paragraph without the words “correctly” and “deceived”. Without those words, the first two of the three possibilities listed would be the same: “households think Brexit will be good for the economy” (not specifying whether it’s true).

30 Donald Pretari January 7, 2017 at 1:25 pm

I know this is hard to grasp, but, sometimes, people are willing to accept less monetary compensation out of feelings of personal self-respect. If some people felt that the current EU situation is maddening and demeaning, it is not irrational or incomprehensible that they would vote to exit the arrangement in search of a more satisfying experience when encountering difficulties in the future. Food for thought.

31 Art Deco January 7, 2017 at 2:38 pm

It’s the view of Mercatus types that they deserve to be maddened and demeaned. Read Scott Sumner. How do you think he treats wage-earning service personnel?

32 mulp January 7, 2017 at 1:30 pm

The UK is doing worse than the US.

The incoming party declares the US a disaster.

How can you say the UK economy is OK?

33 So Much For Subtlety January 7, 2017 at 5:49 pm

So you’re saying the British would be better off if they elected someone like Trump? You know, I agree with you. First time for everything.

34 Steve' January 7, 2017 at 1:42 pm

I wonder if getting rid of all ecenomists would be detrimental or beneficial for the UK economy

35 Lanigram January 7, 2017 at 3:30 pm

No impact.

36 Ali Choudhury January 7, 2017 at 2:16 pm

Answer: Lots of people were holding their breath in June waiting for the referendum result and when there was no immediate negative shock kept spending on the back of a strong local economy.

Consumption will probably taper off now that Christmas and the sales season is behind us and the effects of higher fuel prices and food inflation start to kick in.

37 The Original Other Jim January 7, 2017 at 2:45 pm

>Why did the British economy do OK after Brexit?

I dunno. I why did Hillary Clinton get her ass kicked in the historic 2016 US Presidential Election?

And why were you so convinced that neither one had any chance of happening?

38 Lanigram January 7, 2017 at 3:34 pm

+10

I’m going to read your post again, and again, and again…

I still can’t believe it. Who knows? Maybe someday the Cubs might even win the World Series!!! Nah! Could nevah happen!

39 Em January 7, 2017 at 5:10 pm

Not understanding the question. Brexit hasn’t even happened yet. We’ll talk about it when the UK finally reaches its agreement with the EU and especially when it finally implements it. Or when it fails to reach agreement and has to trade with the EU under WTO rules.

40 So Much For Subtlety January 7, 2017 at 5:45 pm

So you think that market traders are too stupid to consider the future? That markets do not, in reality, price uncertainty and especially uncertainty about the future all the time? An interesting position.

You know, I mean this in the nicest possible way, but if traders are too stupid to take into account the risks of Britain failing to reach an agreement, there is a huge opportunity for smarter people like you to open a fund and really clean up. No, seriously. It would be a public service. Have you considered mortgaging your house and going all-in?

41 jon livesey January 7, 2017 at 6:18 pm

Nicely put. It always gets me when Joe Shmoe announces that he can see what professionals who move trillions before lunchtime can’t see. And that includes academics, looking forward to a nice little pension, and talking about Carl Icahn.

42 Nigel January 8, 2017 at 6:56 am

You know, I mean this is the nicest possible way, but have you ever considered that you’re a horse’s @ss ?
Someone rather smarter than you seem to believe you are once remarked that the market can stay irrational longer than you can stay solvent.

43 John January 7, 2017 at 6:04 pm

I suspect that a lot of people voted in favour of leaving the EU because they equate it with regulations that make life more difficult.

The public are two faced about this. On the one hand when things go wrong they shout “there should be a law against that”, whereas on the other when things get less efficient they complain.

An example is that they find it takes longer and longer to arrange a house purchase, or find that one falls through because of something like the mortgage company’s surveyor finding the wrong sort of plants in the garden, they complain about EU regulation.

Another example is that any time you consult a professional you have to show photo ID and household bills to prove your Identity Purity. There are already moves afoot to make this compulsory when you see your doctor or vote at elections. To add insult to injury, this has to be done every time you see the same professional. As far as I know all this guff about Identity Purity has made no difference to money laundering or crime and indeed may have even made impersonation easier as it gives a clear path as to how to forge it with computer printers and copiers.

Whether these have anything to do with the EU I am not sure, but any regulation is often referred to with the initials “EU” before the word “regulation”.

44 jon livesey January 7, 2017 at 6:14 pm

Michael Haldane, an economist aat the bank of England, this week said that Brexit was economists’ “Michael Fish moment”. Fish was a UK Meteorologist who made a disastrously wrong weather prediction that ended up costing billions.

Incidentally, I agree with the people above who say that anything negative that happens to the UK economy in future will be blamed on Brexit. And I am especially taken by the claim that the UK economy isn’t really holding up, it’s just that people are spending more.

As long as the UK is taking in 300k migrants a year and creating one third of all the new jobs in the EU, with twice the EU’s growth rate and a half its unemployment rate, I am going to go with “holding up”, but that’s just me.

45 Art Deco January 7, 2017 at 10:00 pm

Britain isn’t Luxembourg. You have empirical studies going back five decades which enumerate the welfare benefits of trade liberalization for large diversified economies – static and dynamic. Studies done by vigorous advocates of trade liberalization like Bela Belassa. Benefits are modest.You can tick off the affluent countries in the OECD who prospered without being members of any trade bloc. The notion that leaving the EU was going to be some sort of economic disaster was always press agent pap by people who were upset by the political implications of Brexit.

46 ChrisA January 8, 2017 at 12:39 am

There is no good macro-economic modelling tool that could predict the performance of a large diversified economy like the UK over the short term which has been impacted by a mild shock like Brexit. All competent economists know this. Anyone offering such a prediction should be castigated by any professional ethics commission as simply wrapping up politics in the banner of a profession.

47 Tim January 8, 2017 at 3:11 am

The question is, where is the negative impact of Brexit showing up? It’s true that it hasn’t happened yet, but there are a lot of things that employers could be doing, e.g. pay freezes, recruitment freezes, slowing down investment, where they think that this will impact. Is there an area of the economy that’s really been negatively affected yet?

48 TallDave January 8, 2017 at 3:49 am

It’s not clear how much this really matters anyway, they can negotiate a trade deal on similar terms. It’s not like New York seceding from the United States, the EU is basically this:

The seven principal decision-making bodies—known as the institutions of the European Union—are the European Council, the Council of the European Union, the European Parliament, the European Commission, the Court of Justice of the European Union, the European Central Bank, and the European Court of Auditors.

Except for the ECB they’re probably so limited in actual power it hardly matters, but if you’re the UK, why would you want them even nominally running your country? If you’re Latvia, sure, but who in the UK trusts pan-European institutions to rule them? Seems glib to label this knee-jerk nationalism.

As a free-trade region, the EU is a great idea. As a currency union, it’s problematic. As a government…

49 JWatts January 8, 2017 at 5:39 pm

“As a free-trade region, the EU is a great idea. As a currency union, it’s problematic. As a government…”

+3, It’s possible that the UK could be locked out of the free-trade region, but it’s hard to see how this happens without a commensurate level of loss by the EU. So, it seems more likely that some adjustments will happen, but that they won’t be particularly significant.

I imagine the real and imagined effects of Brexit will be lost in the hype and rhetoric, if and when it ever happens.

50 londoner January 9, 2017 at 10:03 am

the brits are (too?) comfortable with leverage, not willing to lower their living standard until they have to, and came back from vacation with a lot less money in their pocket due to the exchange rate

the mood in london is wait-and-see. day to day economic decisions have not changed much.
long term decision (buying a flat, etc.) different story…

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