Briefings for Britain recently published a large and detailed report which carefully dismantles many of the claims about the economic costs of Brexit that have been put forward over recent years. This report concludes that the hard evidence points to a remarkably limited economic impact of Brexit. This is in sharp contrast to the lurid catastrophising that has characterised so much of the public debate since 2016 and which has seen the economics profession repeatedly embarrass itself.
Yet despite the failure of the widely heralded Brexit catastrophe to materialise, Remainer economists and high-profile public officials have doubled down in recent weeks on their extreme claims, starting a new anti-Brexit campaign that relies even less on reasoned argument and empirical evidence than its predecessors.
The most ridiculous of the recent claims came from ex-Bank of England governor Mark Carney. In an interview for the FT, Carney claimed that ‘in 2016 the British economy was 90% the size of Germany’s. Now it is less than 70%’.
Carney’s figures were wrong, in multiple ways. He used nominal GDP for Germany and real GDP for the UK, immediately invalidating the exercise. He then converted his local currency GDP figures into dollars using market exchange rates, which fluctuate significantly from year to year and even week to week. He then chose a base period when the sterling exchange rate was unusually strong. There were so many basic errors in Carney’s analysis that ex-IMF economist Ashoka Mody rightly dismissed it as ‘complete bullsh*t’.
A proper analysis of the relative performance of the UK and German economies since 2016 would either compare real growth rates of GDP in local currencies or look at levels of GDP in dollars calculated using purchasing power parity (PPP) exchange rates – which remove the effect of short-term currency fluctuations. Neither approach shows anything like the pattern Carney claimed. The UK economy has grown at a similar rate to that of Germany since 2016 and the relative sizes of the two economies in PPP dollars have barely changed (Chart 1).
As a supposed expert, Carney almost certainly knows all this. But he chose to use deliberately misleading figures instead. Even other Brexit-hostile economists like Jonathan Portes were embarrassed.
But this did not stop Carney making further questionable claims soon after, suggesting that Brexit was responsible for rising UK inflation and rising interest rates. These claims were also echoed by Bank of England officials including Huw Pill, the Chief Economist. And we also had claims that Brexit had raised UK food prices by up to 6% by Bank MPC member (and long-time Brexit opponent) Swati Dhingra.
Again, a sensible analysis would not support these claims. The recent rise in inflation in the UK has been very similar to that in the EU. Meanwhile, the claim that Brexit has raised food prices by 6% fails the most elementary sniff test, as do so many lurid claims of this sort. This estimate is based on modelling rather than hard data, and the hard data tell a story very difficult to square with the modelling: since the UK Brexit referendum in June 2016, food prices in the UK and the eurozone have risen at almost exactly the same rate.
Breaking the period since the Brexit vote down, we can see that at the point just before the UK left the EU customs union and single market, at the end of 2020, UK food prices had risen at a slightly slower pace than those in the eurozone since 2016. Then, in the first nine months or so of 2021, food prices in the UK rose at a notably slower pace than in the eurozone (Chart 2). This is presumably the period when new trade barriers should have caused the supposed 6% rise in prices. But to believe that we would also need to believe that in the absence of Brexit, UK food prices would have seen considerable deflation in this period – something that did not happen anywhere else, including the US. Finally, since the latter part of 2021, UK food prices and eurozone food prices have again risen at a similar pace, pushed up by the global rise in food and energy prices.
Huw Pill’s strange claim that UK inflation has been fuelled by Brexit-related labour shortages is also hard to square with actual data. The latest migration data showed a surge in migration for work purposes – some 222,000 people immigrated to the UK for this purpose in the year to June 2022. Even with the pandemic sharply cutting such immigration in 2020, the average inflow over the last three years is still 144,000 which is higher than the average 132,000 per year seen in the decade before Brexit.
What about interest rates? Global policy interest rates started to rise in the latter part of 2021. Since then, UK Bank rate has increased by 2.9%, from 0.1% to 3%. Meanwhile, the US Federal Reserve has increased interest rates by 3.9%, to 4%, Canada by 3.5%, to 3.75% and the ECB has increased its repo rate from zero to 2%. So, the rise in UK short-term rates has not been out of line with other major economies.
Perhaps these excited commentators are referring to longer-term interest rates? It is true that in September there was a spike in UK bond yields in the wake of the ill-fated mini-budget. But this did not have anything to do with Brexit and has subsequently been entirely reversed. The spread between UK and German 10-year yields is currently lower than it was before the Brexit referendum and UK credit default swaps (a measure of the riskiness of UK debt) are below their long-term average and below the level seen before the Brexit referendum (Chart 3).
Another set of dubious claims has recently come from ex-Bank of England MPC member Michael Saunders who has claimed that Brexit has permanently damaged the economy and that without it, there would be no need for fiscal austerity.
Once again, there is little to no substance to these claims. The UK’s fiscal accounts were in decent shape before the Covid pandemic hit, with a budget deficit of only around 2% of GDP – there was no sign of any Brexit-related strain here. The current problems are clearly the result of the massive rise in spending that has occurred since.
Moreover, it is far too early to make serious forecasts about how the long-term growth rate of the UK economy has changed since the UK left the EU customs union and single market at the start of 2021. Such claims are generally based on modelling exercises with questionable assumptions. An oft-quoted number is the claim by the Office of Budget Responsibility that the UK economy will be 4% smaller because of Brexit. As we have previously argued, this figure is based on extremely shaky foundations. It is an average figure across a number of studies, some of which have absurdly high estimated effects from Brexit. These studies also generally rely either on negative assumptions about immigration which are pulled out of the air or on a supposed link between trade intensity and productivity which is simply not supported by the empirical evidence.
Moving on to financial market effects, we perhaps hit peak absurdity with claims about how the London stock exchange is now smaller than Paris and how this shows the UK’s decline as a global financial centre. Some of the commentary around this, such as from historian Dan Snow, reached a pinnacle of hysteria comparable with the worst moments of the 2016 referendum campaign.
As usual, these claims have no basis in reality. The original calculations by Bloomberg were simply incorrect, based on a ridiculously narrow measure of stock market sizes. The value of all shares traded in London is far higher than in Paris – around US$6.2 billion versus US$3.7 billion in terms of listed stocks. If we also take into account off-exchange trading, which accounts for a large share of overall trading, the gap is probably wider still.
More importantly, this is not a good measure of the importance of the UK as a global financial centre. Far more important is the UK’s position in the key global wholesale financial markets, for foreign exchange and interest rate derivatives. Here, the UK’s position remains dominant as shown by the triennial surveys carried out by the Bank for International Settlements. The latest survey gives the UK a 38% market share in FX markets and a 46% market share in interest rate derivatives. These market shares fluctuate slightly from survey to survey but have basically not changed much since 2010 (Chart 4).
There have also been recent attempts to discredit the UK’s trade policy. Ex-agriculture minister George Eustice recently made claims about the UK’s trade deals with Australia and New Zealand which are basically nonsensical, as Briefings for Britain has pointed out elsewhere. And the Guardian recently ran a story branding the UK’s trade deal with Japan a flop, with trade having supposedly ‘slumped’ since it was signed. Leaving aside the fact that deal only came into force in early 2021, was quite modest in scope, and that trade flows have obviously been affected by the pandemic, the numbers in the article were also out of date and wrong. In Q3 2022, goods trade between the UK and Japan totalled £3.8 billion, up from £3.3 billion in the final quarter of 2020. For services data, the latest figures, for Q2, show bilateral trade of £3.0 billion up from £2.9 billion in Q4 2020.
The pattern that emerges from all of this is of supposed experts abandoning all pretence at objectivity and engaging instead in pure propaganda, using misleading data or contentious modelling techniques to establish dubious ‘facts’ and making lurid claims over and over again in the hope that people will believe them.
We should expect this continue, for two reasons. First, the new UK government shows little or no sign of pushing back against such claims – unsurprising given that it has a distinct Remainer bent. Second, the UK economy is heading for a recession, made worse by excessive fiscal and monetary tightening. This recession will be a glorious opportunity for Remainers to blame Brexit for the unfortunate consequences it will bring with it such as rising unemployment and falling asset prices. The fact that recessions will also be occurring elsewhere, with similar unpleasant consequences, will be ignored.
The endgame for Remainers is clear. To discredit Brexit sufficiently in the eyes of the public that a process of gradual rejoining of the EU can be safely started. How this is achieved is apparently immaterial. It appears not to matter to the likes of Carney and others that they are dragging the already tattered reputation of the economics profession still further through the mud to achieve their political goals, reducing the profession to little more than a rabble of propagandists for hire.