Score One for the Experts as Brexit Costs Grow

The vote to leave the EU is taking an economic toll on Britons, before the separation even begins.

The long, expensive good-bye to Europe.

Photographer: Emmanuel Dunand/AFP/Getty Images

In the run-up to the U.K.'s 2016 referendum on leaving the European Union, and immediately after it, the "remain" campaign was much derided for fear-mongering. People are sick and tired of experts warning about doomsday scenarios, said Conservative politician and lead-Brexiter Michael Gove. Those warning that Brexit would cost the economy were dubbed "remoaners"; Chancellor of the Exchequer Philip Hammond was compared to Eeyore for his caution.

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It was, granted, a disastrous campaign strategy: Focusing on the economic costs of Brexit ignored the very real economic pain that many Britons already felt. It overlooked the fact that many Britons were motivated by distrust of the European Union, or blamed immigrants for their own economic uncertainty. They were willing to accept some cost to be rid of that perceived burden.

Now, though, the experts are making a comeback. Their tactics may have been clumsy, but the general thrust of their arguments -- that Brexit would be expensive, very expensive -- look more on target.

Britain's Office of Budget Responsibility, the public watchdog, has downgraded its forecast for gross domestic product growth to 1.5 percent this year and 1.4 percent in 2018, from 2.2 percent and 2.1 percent in March 2016, just before the vote. Forecasts for productivity and business investment have also been revised downward. But it's not just forecasts that are worrying; they are often wrong anyhow. It's what's happening right now.

According to the Office for National Statistics, the U.K. lags behind most other advanced countries in terms of both private and public investment. The ONS looks at gross fixed capital formation, which measures spending on non-financial assets from both government and non-government sectors. It concluded that the U.K. has the lowest average non-government investment level of any G7 nation as a percentage of GDP and the second-lowest average government sector investment. That would suggest a major plan for some supply-side investment -- infrastructure, education and the like -- is warranted.

But with a falling pound, rising inflation and a country in the throes of a historic undertaking as it disentangles itself from the EU, there is hardly room to spend.

Hammond delivered the most important economic policy set-piece of the year Wednesday with his annual budget address. His government is so unpopular and divided that he no doubt wanted to play Santa Claus: He offered handouts for key areas of the economy (among them, cut-price rail cards for the young and tax relief on the purchases of a first home) and there was some promises of home-building and road-building. But mainly he told Britons he needed to hold his ammunition. In fact, he told them, he had already put 700 million pounds aside to cover Brexit costs and was budgeting for a further 3 billion pounds.

The problem with economic data is that it's often possible to selectively paint different pictures. That was certainly the case in the immediate aftermath of the vote, when despite the pound's decline, other signs were mixed, including a remarkably robust consumer economy.

Hammond tried to put a positive spin on things, as you would expect. He found a few silver linings to highlight: a public debt that will decline for the first time in 17 years, a budget deficit that will be only 2.4 percent this year and is trending lower, a vibrant tech culture (a new tech start-up is registered every minute, he said, without mentioning how many actually survive and grow). But none of these are a sign of a Brexit-proof economy. The debt fall, for example, is largely thanks to selling off shares in the state-run bank RBS and by some accounting changes.

It takes a lot of straining these days to argue that the glass is half full. A recent piece of research from Vox analyzes the Brexit costs that have already materialized. These aren't forecasts that can be swept aside. The deterioration in the pound wasn't just a temporary, post-referendum phenomenon; it has continued and is still about 10 percent below its pre-referendum value.

Unsurprisingly, inflation followed; consumer price indices in the U.K. are rising ahead of the U.S. and the euro area, with inflation at 3 percent in October (not all of that is Brexit-related, but the authors argue that the effect is nevertheless substantial). Indeed, it rose most in some of the regions of the country that voted most wholeheartedly for Brexit, including Wales, though Northern Ireland and Scotland, strongly remain areas, were also hit hard by inflation; these are all regions that rely heavily on a high level of imported products, which are most hit by the fall in the pound. All in, Brexit is already costing the U.K. consumer about 404 pounds ($536) per year, according to the authors. Retailers are predicting a tough Christmas season.

All this, and Brexit hasn't even happened yet.

It's not clear whether a trade deal with Europe will result from the stalled negotiations, or a blanket withdrawal that means the imposition of tariff and non-tariff trade barriers that would hit the U.K. economy hard. But even before those big questions are settled, Britons are paying a high price for defying the warnings ahead of their 2016 vote. It's no longer just predictions. Score one for the experts.

(Corrects 11th paragraph reference to Wales, which voted for Brexit.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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