The UK needs a ‘friction-light’ Brexit just to grow 1.4% next year. But Yael Selfin says that better productivity is the forgotten key to higher growth.
It was as blunt a message as we’ve heard from British industry in months. On Tuesday, Ralf Speth, Jaguar Land Rover’s chief executive officer, told an audience – which included the prime minister – that “Brexit is due to happen on the 29th of March next year. Currently, I do not even know if any of our manufacturing facilities in the UK will be able to function on the 30th.”
His warning also served to remind just how high the stakes are. Brexit is likely to inflict an unprecedented peacetime shock to the UK’s business environment in less than seven months’ time. As of today no one can tell exactly what the full impact will be.
It has been against this deeply uncertain backdrop that we published our quarterly UK Economic Outlook: Moderate, occasionally rough. Visibility poor earlier this week. Just like the weather-related Shipping Forecast that inspired its title, the report is an attempt to impose a little structure on what is ultimately an infinitely complex system. Even with that caveat, the fog right now makes the task of economic forecasting incredibly difficult.
That is why we have offered two forecasts … but provide one firm piece of advice alongside.
First the forecasts: In our base case scenario, we see the two sides in talks agreeing a ‘friction-light’ Brexit deal. That should result in the economy growing at a modest 1.3% this year and 1.4% in 2019. Note that despite this being a relatively positive scenario, these growth rates remain the lowest since the Great Recession of 2008-2009.
Under the second scenario, talks breakdown and we suffer a disorderly Brexit. Whilst the exact course of events remains extremely difficult to predict, we looked at a scenario with a 5-10% fall in the value of the pound and consequently higher inflation. With no other framework, trading relations would fall back to WTO rules, which in itself would be a huge source of uncertainty and would raise the possibility of contractual disputes between suppliers and customers. Supply chains could be significantly disrupted in the short term.
Under these circumstances we expect a significant slowing of growth to 0.6% in 2019 and 0.4% in 2020, when the full impact would be felt. What prevents the numbers looking even worse is the likelihood of an uptick in investment by businesses and government as they adjust to the new business environment.
So we have two forecasts, but one clear line on what clients should do: understand your exposure from top to bottom and prepare for a range of possible Brexit scenarios.
Whilst stressing that Brexit poses a number of risks and huge unknowns, it is important to stress that it is not the only show in town when it comes to the factors that will drive future growth. What is actually holding the UK back, more than anything else, is its poor and long-running productivity malaise. Just returning it to pre-2008 levels would see the British economy grow by more than 2%.
Of course we cannot divorce the two issues and Brexit is weighing on productivity. First, businesses are not investing at the same rate as they might have been in new plant, machinery and software; second, Brexit severs some of the international ties that can typically lead to companies adopting best practice and know how; and third Brexit will deter some foreign born talent from living here – incomers that might have founded start-ups, designed new machines or discovered new medicines.
That makes a focus on pulling all possible levers to lift productivity all the more important. With an economy approaching full capacity and unemployment at historically low levels, we are hitting our growth ceiling without an improvement in this area.
So, for instance how can we accelerate investment in areas outside London and the South East where productivity lags even further? How can we ensure British workers have the right skills to meet employers’
needs? As he prepares for Autumn Budget in a matter of weeks, this is the bigger picture the Chancellor should remember while working to land Brexit successfully.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK. You can register for the email subscription list of this column and expert views from our Brexit leaders.