Matthew Lynn

The IMF still hasn’t understood the economics of Brexit

The IMF still hasn't understood the economics of Brexit
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Output is under pressure. Prices are starting to rise, living standards are getting squeezed, and every day brings fresh stories of one bank or another leasing office space in Frankfurt or Dublin. As the International Monetary Fund downgrades its growth forecast for the UK, whole edging up its predictions for our continental neighbours, Remainers can hardly believe their luck. Finally, all those predictions of disaster are coming true. Indeed, some are starting to describe Britain as the ‘sick man of Europe’ – a particularly potent phrase, since it was precisely to escape that label that we joined the EU in the first place more than four decades ago.

The trouble is, there is a problem with taking the IMF too seriously. It is a terrible forecaster. More importantly, it still doesn’t seem to have gotten its head around the economics of Brexit. Until it does, no one need pay it much attention.

In its latest assessment of the global economy, the Fund has trimmed its forecast for the UK to 1.7 per cent, down from the 2 per cent. Slower consumer spending, and the impact of higher prices from a devalued pound are inevitably hitting output, much as you would expect for an economy that mainly relies on services and shopping to keep it ticking over. At the same time, Italy and Spain got a 0.5 per cent upgrade, while Germany and France got 0.2 per cent and 0.1 per cent respectively.

It is quite a stretch to describe that as Britain falling back into the Stone Age while Europe storms ahead. The Fund only thinks mighty Germany will expand at 1.8 per cent, a fraction faster than Britain, while Emmanuel Macron’s new look whizzy, reformed, can-do France is only expected to grow by 1.5 per cent, which is still less than backwards Brexit Britain. Italy is now only on 1.3 per cent, and only Spain is doing substantially better, on 3.1 per cent – but Spain, remember, is bouncing back from a deep recession.

Of course, we will have to see whether those forecasts are right. The Fund has a bad habit of getting these things wrong. It told us that George Osborne’s austerity budgets would create a recession, while they did no such thing. It told us that voting to leave the EU would create an immediate recession, and that didn’t work out either. Worst of all, it told us that if Greece accepted austerity, and tightened its belt within the euro, it would have recovered by now, when in fact it has suffered a 25 per cent drop in output in the worst economic policy catastrophe since the 1930s. No one should take its projections too seriously.

More worrying, it appears to have learnt nothing from the past year. The IMF, along with most central banks, and mainstream forecasters, inhabit a mental universe in which the EU and the Single Market are crucial to the economy. In some areas, such as cars for example, they may be. But what we have found out in the last twelve months is that neither makes much difference to a services-based, retail economy such as ours. So far, inward investment has been buoyant, banks are still coming to London, employment is rising, and the economy has kept on expanding. Why? Because exports to the EU make up only a small and declining fraction of our total GDP, and, such as they are, they have relatively little to do with trade agreements.

True, there will be quarters, and even whole years, where Europe does better than we do. And there will be years when it is the other way around. But Brexit is not about to lead to any serious economic contraction, and over the medium-term is more likely to strengthen the UK than weaken it, and there is no point trying to pretend otherwise. The IMF may not have got that yet – but eventually it will have to accept it.