Saturday, 3 February 2018

23 May 2016: HM Treasury analysis: the immediate economic impact of leaving the EU

From HM Treasury Archive, published one month before the EU in/out referendum when Project Fear was working overtime:

A vote to leave would cause a profound economic shock creating instability and uncertainty which would be compounded by the complex and interdependent negotiations that would follow. The central conclusion of the analysis is that the effect of this profound shock would be to push the UK into recession and lead to a sharp rise in unemployment.

Two scenarios have been modelled to provide analysis of the adverse impact on the economy: a ‘shock’ to the economy, and a ‘severe shock’.

In the ‘shock’ scenario, a vote to leave would result in a recession, a spike in inflation and a rise in unemployment. After two years, the analysis shows that GDP would be around 3.6% lower in the shock scenario compared with a vote to remain. In this scenario, the fall in the value of the pound would be around 12%, and unemployment would increase by around 500,000, with all regions experiencing a rise in the number of people out of work.

In the ‘severe shock’ scenario, the rise in uncertainty, the effect on financial conditions and the transition effects are larger. The analysis shows that after two years the level of GDP would be 6% lower, the fall in the value of the pound would be 15% and unemployment would increase by around 800,000.

OK. It's now nearly two years later, so let's mark their 'shock' scenario.

1. Recession? Defined as two consecutive quarters of GDP contraction, nope.

2. Spike in inflation? Over the last ten years, CPI inflation has been as low as 0.2% with occasional peaks of over 4%. It's currently 2.7% or so, pretty much the ten year average. Certainly not a "spike".

3. Rise in unemployment by about 500,000? Unemployment seems to be ever so slightly lower than in June 2016. OK, the unemployment figures are fudged, and there are too many people on crappy 'zero-hours contracts', but it's hard to describe that as a rise in unemployment.

4. GDP around 3.6% lower than it would have been? GDP is now 2.7% higher than it was in Q2 2016. Would it be 6.3% higher if we'd voted Remain? Highly unlikely. Not even the best performing EU economy has grown that much.

5. Fall in value of the pound 12%? GBP = EUR 1.28 in the last couple of months before the referendum. Over the last couple of months, GBP = 1.13. That's down almost exactly 12%. Against USD, GBP fell, but has clawed most of it back again and is down about 5%.

I'll give them half a mark for predicting fall in GBP, although they overestimated it. I think it's fair to give them zero marks for any of the other answers,. Add an extra half mark for neat presentation and that's 1/5.

Their 'severe shock' scenario is a a straight 0/5.
Can anybody see any reason why we should take their recently leaked doomsday forecasts seriously? The ones predicting that the UK economy would grow 0.5% a year more slowly than otherwise if we do a 'clean brexit'?


jack ketch said...

Can anybody see any reason why we should take their recently leaked doomsday forecasts seriously?

(As someone bitterly opposed to BrexSShite and all it's works) Simple answer: NO!

As said before, even the frothiest lipped, armchair xenophobe, 'hang May for treachery' BrexSShiteur will admit that BrexSShite will damage the economy for a period....'long term gain for short term pain'.

What is unbelievable to anyone who values parliamentary democracy (as opposed to Plebis-cides/mob rule) is how the government has dealt with this leak. And if I hear the claim that such studies need to be kept SECRET otherwise they threaten to 'give away our hand' in 'negotiations' I shall scream and scream and scream til I am 'thick'! Do they really think the EU/Large EU firms haven't been wargaming BrexSShite since Farage Smeagol Golem first whinged about 'I don'ts likes it, nasty EU, prrreciouss'?! The leaders down Kaiserstrasse way probably have more insight into the British economy than Hammond does.

Mark Wadsworth said...

JK, agreed. Although it's spelled "its" not "it's" in that context.

jack ketch said...

Thank you for the correction, i'm sure you're right and I shall try and remember in future. Among the many things I struggle with in English is the 3rd person sing genitive. I shall console myself with thought it could have so easily have been a Grocer-esque "its's".

Physiocrat said...

I am constantly converting UKP to SEK so I keep tabs on the exchange rate. It is roughly in the middle of what it has been since 2012. The SEK is a middling kind of currency which makes it a fair indicator. Purchasing power of sterling for normal daily living seems to be about 10% more than what it would be if there was purchasing power parity so there is nothing to complain about. To suggest that sterling has "tanked" is absurd.

Sweden is coming up for the implosion of its property bubble, which has been built up with less-than-zero interest rates for a couple of years. It should be interesting. Having got a flat here, it is a theoretical loss. You win some and lose some; it is a matter of keeping the bets hedged.

Mark Wadsworth said...

Ph, ta for additional evidence.

paulc156 said...

The treasury forecasts were obviously wrong. Were they unconditional forecasts though? The current ones are pretty similar anyhow and as JK says above it's pretty uncontroversial,(excluding outliers like Minford...and erm, well Minford) that gdp will suffer no matter what, in the short to medium term. It is arguably starting to suffer now. Even whilst oecd gdp has accelerated somewhat, ours has diverged from the group since brexit.
The problem with some of those earlier forecasts is they failed to accurately model a few phenomena.
1. BoE determination to hold rates despite some worries over sterling and therefore inflation. (and it should be recognised that the more limited falls in sterling and smallish rise in inflation did put paid to the hitherto tiny rises in real wages). So people on average a bit worse off.

2. Brits carried on spending...on their credit cards mainly. Wily Coyote style, they've since started to sober up. The credit card statements came in.

Interestingly the current forecasts do factor in plausible trade deals with the Donald and remnants of empire etc and it turns out they contribute a figure of plus 0.6% of gdp combined...over 15 years. Hmm.
That does rather reflect what we should already know. The 'gravity models' derided by fuckwits like Rees Mogg are in fact about the most credible and robust of economic models on trade out there.

Mark Wadsworth said...

PC, you would say that, wouldn't you?

1. BoE and HM Treasury are the same thing. It's not plausible for a government department to say that it didn't factor in what it was going to do itself.

2. The hair shirt brigade always wail about credit cards. Credit card spending has not changed much.

Yes, Rees Mogg is a despicable horrible politician, yes, the Tories are grinding the little people down etc, that is a separate topic and has nothing to do with Brexit. That is to do with the Tories.

Mark Wadsworth said...

PC, the whole Project Fear post-Brexit doom and gloom forecasts remind of the global warmenists, who have been predicting disaster "in the near future" for thirty years, blind to the fact that so far, nothing much has happened.

paulc156 said...

MW. Blimey you're going for the full monty. Global warming gets lumped in with brexit forecasts! Ironic since your regular mantra is to deride posts for going 'off topic!'.

I thought the warming deniers had gone quite on here for a while. Not surprising considering 2016's record meant that 16 of the 17 warmest years have occurred since 2000 and 2017 topped that without the assistance of el nino. The disasters of global warming such as they might be will be felt primarily in low lying coastal regions and small islands, disproportionately amongst poorer populations and not for a couple of decades since effects are cumulative (shock)... and are unlikely in any case to be felt in traditional Tory voting areas that end with the word 'Hill'.

Now back on topic. Your comments re B of England and treasury being the same thing are obviously nonsense. You do or should know that the former gained its independence from the latter under Gordon Brown.

Your dismissal about credit cards ("consumer borrowing' is really the more pertinent term) is also wrong and obviously so.

"Retail sales and other forms of consumption, including pubs, restaurants and leisure activities, all performed extremely strongly in the second half of 2016. The ratio of savings to income fell and although companies did cut investment, consumers increased their borrowing DRAMATICALLY, with unsecured credit growing at annual rates of more than 10 per cent." That was the FT in summer of 2017.
Would you want to contest that basic and easy to verify point?

They also point out the acceleration of GDP growth (itself not anticipated) across the globe and in the EU in the second half of 2016 contributed to greater UK growth than expected. Hardly surprising?

You might think economic forecasting is a bit of a joke, fair enough, but simply ignoring evidence on borrowing and presuming the BoE coordinated intended monetary policy with the treasury prior to the referendum based on a brexit vote is just being silly.