The Economist - USA (2019-11-02)

It’stheeconomy,stupid

Source:ONS

Britain,realwages,wholeeconomy

%changeona yearearlier

2008 10 12 14 16 18 19

-6

-4

-2

0

2

4

GordonBrown

loses

DavidCameronwins

TheresaMay

losesmajority

General

elections

Election

called

I

n “resident evil 2”, a horror video-

game released earlier this year, shooting

a zombie does not necessarily kill it. Even

after a headshot, the beast may continue to

lumber forward in pursuit of the player’s

brains. The British economy has behaved

in a similar fashion since the Brexit refer-

endum of 2016. Many pundits had predict-

ed that the uncertainty caused by the vote

to leave would send Britain into recession,

with unemployment shooting up and

wages collapsing. But the economy has

plodded on. That will work to the advan-

tage of the incumbent Conservative Party

at the election on December 12th.

Smoothing through quarterly data,

since the referendum the economy has

grown at a quarterly rate of about 0.4%

(1.5% on an annualised basis). That is far

from impressive by historical standards.

Surprisingly enough, however, it is about

as fast as the average growth rate across the

g7 over the period; President Donald

Trump’s trade war has dented global eco-

nomic growth. And Britain’s labour market

has strengthened. The unemployment rate

has continued to decline, and now sits

around a four-decade low of under 4%. The

share of gdp accruing to workers in the

form of wages, salaries and employment-

related benefits is edging up.

Two main factors are responsible for

this slow but steady performance. For

much of the post-referendum period con-

sumers have been doggedly upbeat. Analy-

sis last year from economists at the Bank of

England suggested that, since the referen-

dum, spending by Leave voters had grown

more quickly than that of Remainers. The

tight labour market has supported con-

sumption spending. So has borrowing.

Since the referendum, credit-card debt has

grown by about 8% a year, a high rate by

post-crisis standards. In early 2017 house-

holds’ savings ratio (ie, the share of their

disposable income which they were setting

aside) fell to its lowest level since 1963.

In recent months growth in consump-

tion spending has slowed—perhaps house-

holds became nervous as Brexit day ap-

peared to be just around the corner. Yet

another source of demand has taken its

place. Breaking from its deserved reputa-

tion for fiscal austerity, the Conservative

government has turned on the spending

taps. A spending review in September

promised £13bn ($16.7bn, or 0.6% of gdp) of

extra funding for public services and in-

vestment. In July doctors and dentists got

an above-inflation pay rise. A four-year

cash-terms freeze on most working-age

benefits will end in April. The budget defi-

cit (ie, the difference between tax receipts

and government spending) is once again

increasing, having been on a downward

path since 2010.

The rise in living standards comes at a

useful time for Boris Johnson, the prime

minister. In Britain’s three most recent

general elections, incumbents did well

when real wages were rising smartly, and

badly when they were not (see chart). With

hindsight, it is clear that Theresa May

picked pretty much the worst possible time

to go to the polls: in June 2017, the month

her snap election was held, real wages fell

by 0.5%, largely the result of higher con-

sumer-price inflation caused by the depre-

ciation of the pound. This time, by con-

trast, Labour’s contention that the British

economy needs a complete overhaul may

seem less compelling.

I will feast on your Keynes

Like a wounded zombie, however, the Brit-

ish economy has not escaped unscathed.

One paper from academics at Cambridge

University suggests that uncertainty over

trade policy has dented export prospects.

Fearful of future tariffs on exports, many

firms have pulled back from supplying for-

eign markets. That in part explains why,

despite the fall in the value of the pound,

which should make Britain’s wares more

competitive in foreign markets, there is lit-

tle sign of an export boom. Meanwhile, re-

cent research from Nick Bloom of Stanford

University, and colleagues, suggests that

Brexit-related uncertainty has held back

business investment—which, in real

terms, is no higher than it was at the time of

the referendum.

Low levels of capital spending by firms

will weigh on Britain’s productivity, which

already has barely grown in the past de-

cade. That will hold back increases in real

wages. And the drag from Brexit will be-

come much more noticeable when it actu-

ally happens. Over the long run Mr John-

son’s Brexit deal would reduce incomes by

about 6% compared with what they would

otherwise have been—only a marginally

better outcome than the estimated cost of

leaving the eu with no deal at all. The para-

dox of the forthcoming election is that the

prime minister is likely to reap the rewards

of an unexpectedly strong economy, even

as he promises to hobble it. 7

Britain’s economy is holding up well—for now

Economic growth and the election

The zombie economy

The EconomistNovember 2nd 2019 Britain 51