Is the ‘Brexit bounce’ the real deal?

Economists are divided on whether there will be a significant boost to the UK economy from a reduction in Brexit uncertainty. I’m optimistic and expect growth to accelerate over the course of 2020 and beyond. Others are not, arguing that the best we can expect is more certainty of a bad outcome. Here’s a summary of the main points on both sides – and the early evidence.

It would be wrong to claim that Brexit uncertainty is over, for two main reasons. First, not a lot will actually change on 31st January. The UK will cease to be an official member state of the EU, but will remain in the single market and customs union, and continue to follow EU rules, during a ‘transition period’ which is expected to last until the end of the year. We may therefore be little the wiser about what leaving the EU means for the economy in the longer term.

Second, the hard work in negotiating a permanent new relationship between the UK and the EU will only just be beginning and the schedule is tight. You may (or may not) want to read the pessimistic assessments from the Institute for Government, UK in a Changing Europe, or the Centre for European Reform.

But there is now less uncertainty about Brexit than there was before the general election. We know for sure that the UK is leaving the EU and there is much greater clarity about the timing of the next stages, including the hard deadline in UK law for the end of the transition period. If the election had gone differently, we might have been preparing for another referendum and an even longer delay.

This is significant and surely worth something. Those companies most directly affected by Brexit will continue to focus on the details that are crucial to them. But Brexit will no longer dominate the national news as it has for the last three years, when it depressed business and consumer confidence and diverting the government from tackling other issues – from infrastructure spending to social care – that probably matter more to most people.

It is also wrong to focus solely on the negotiations that still have to be completed with the EU. Businesses are already learning more about the likely shape of other post-Brexit arrangements which will largely be in the hands of the UK government, notably a new policy on migration, where the worst fears of some are being proved wrong. There is now strong momentum behind a US-UK trade deal, and others, too

Of course, Brexit pessimists will continue to argue that the economy has been held back by the reality of the long-term damage that they believe leaving the EU will do, not just uncertainty about the process, and that this reality hasn’t changed.

However, even if Brexit does has some negative effects in the long run, companies will at least soon know more about what they will be dealing with in terms of new trade barriers or limits on movement of workers, and hence how to respond. This may mean that some projects do not go ahead at all. But others will, and the sluggishness of investment since the 2016 referendum suggests there is plenty of pent-up demand that could soon be unleashed.

This optimistic view is largely speculative, for now. But the early survey evidence is encouraging, with marked improvements in business sentiment in the latest CBI survey of manufacturers, the Deloitte CFO survey, and the flash estimate of the composite PMI for January. In particular, investment and hiring intentions have improved.

There are still some caveats. It’s possible that the rebound in the surveys is a ‘Boris Bounce’, reflecting relief that Mr Corbyn has not become Prime Minister and hopes of more effective domestic policies, rather than the start of a sustained recovery driven by reduced concerns about Brexit.

This possible distinction is perhaps clearest in the post-election survey of IOD members, where the surge in optimism was linked to domestic issues such as business rates and broadband. In contrast, 55% of respondents to the IOD survey agreed with the statement that ‘my organisation will only be able to make planning and investment decisions with certainty when we understand our future relationship with the EU’.

It may also be wrong to place too much weight on a single round of data. In particular, the PMI fell sharply in July 2016 in the wake of the referendum result, only to rebound the next month. The commentary accompanying the latest PMI survey was still cautious.

But I would view the glass as more than half full. For a start, even if there is only a little more clarity about Brexit itself, the fact that it has happening has contributed to the general reduction in political uncertainty that all surveys have identified. It may be hard to distinguish between a ‘Boris bounce’ and a ‘Brexit bounce’, but this is partly because the two are related.

What’s more, every survey that has looked specifically at Brexit uncertainty has found that it has fallen, or at least become less important. The Bank of England’s Decision Maker Panel for January found that 59% of businesses expected Brexit uncertainty to persist until at least 2021. However, the proportion of firms citing Brexit as one of their top three sources of uncertainty fell to 45%, the lowest level since August 2018.

Similarly, the Deloitte survey showed that Brexit has dropped to third place on CFOs’ lists of concerns, having been top ever since the 2016 referendum. Even the IOD found that 35% of respondents agreed with the statement that ‘leaving the EU with this withdrawal agreement will give my organisation the certainty needed to make planning and investment decisions’.

In short, Brexit uncertainty is not going to disappear overnight. But the available evidence supports the view that the economy is now heading in the right direction again, with business investment already at a turning point.

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