United Kingdom: Interview with Oxford Economics
Boris Johnson became prime minister on 24 July, with a promise to loosen the fiscal purse strings and leave the EU by 31 October—“no ifs, no buts”. However, with that deadline fast approaching, the UK’s political—and by extension economic—future is still very much in the dark. To shed clarity on the situation, and explore what could be in store for the economy and on the Brexit front, we spoke to Andrew Goodwin, Chief UK Economist at Oxford Economics.
Andrew Goodwin is Chief UK Economist at Oxford Economics, where he is responsible for managing the UK macroeconomic forecast and UK research content, as well as leading the company’s analysis of Brexit. He regularly commentates on the UK economic outlook in the print and broadcast media.
Andrew has been with Oxford Economics since August 2008. Prior to joining Oxford Economics, he spent three years working for Experian, where he managed the Regional Planning Service and was responsible for producing UK macroeconomic forecasts from the national level down to local authorities. Before joining Experian, Andrew spent four years as a senior economist at the Confederation of British Industry (CBI).
- How will victory for Boris Johnson affect fiscal policy?
Johnson’s campaign gave the clear impression that he plans to loosen fiscal policy, but it remains to be seen whether he follows through on his promises. We’ve modelled the impact of his four main pledges – increasing the income tax higher rate threshold, raising the starting point for paying National Insurance Contributions, increasing the education budget and employing more police officers – and we estimate that the package would raise GDP growth by around 0.2 ppt a year for the next three years, if delivered alongside an orderly Brexit. The boost is fairly limited because the policies – particularly the increase in the income tax threshold – are poorly targeted.
- Will victory for Boris Johnson have any bearing on inflation and monetary policy?
Brexit will also be pivotal to prospects for inflation and monetary policy. An orderly Brexit should see sterling strengthen and inflation slow. With the MPC preoccupied with the risk that a tight labour market could drive up inflation, they would probably continue to keep policy unchanged, rather than follow other central banks in cutting interest rates. But in a no-deal scenario, the sterling depreciation would drive up inflation, probably to around 3% in 2020. And it is likely that the MPC would ignore the prospect of temporarily higher inflation and cut interest rates in order to cushion the blow to demand.
- In your view, how does Boris Johnson becoming PM affect the likehood of different Brexit scenarios?
We see Johnson’s victory as raising the chances of the UK leaving the EU in October, with both the deal and no-deal options looking likelier than before. But we still see an extension as marginally the most likely outcome. Even if there was the will, there is not sufficient time to renegotiate the withdrawal agreement, while parliamentary opposition to the deal and no-deal options is firmly entrenched. Ultimately an extension looks like being the path of least resistance and we think that the EU would agree to one more extension to March 2020, particularly if it was to give time to hold an election.
- Boris Johnson has said he would like to replace/remove the contentious Irish backstop from the Withdrawal Agreement. Will he succeed in this?
In a word – no. It is highly unlikely that the EU will back down on this point. And if the government truly believed that alternative arrangements would solve the problems around the border then it would have no problem signing up to the backstop, as it would never need to be used.
- What do you think the final outcome of Brexit will be: leaving without a deal, leaving with a deal or no Brexit?
We think that ultimately MPs will give their approval to leaving with a deal because it’s the least bad option for the greatest number of MPs.
- Do you see snap elections in the coming months?
I put the odds at 50/50. Having to fight an election would be a huge risk for both of the two main parties given the state of the polls and the potential for the Liberal Democrats and Brexit Party to win large numbers of votes. This puts far more seats into play than would usually be the case and makes it very hard to predict the outcome. But forcing an election might be the only way to stop no-deal, while the Conservatives need to find a way of changing the parliamentary arithmetic at some point else it will be incredibly difficult for them to govern.
- The economy contracted in Q2. Do you see this weakness carrying over to the third quarter?
The fact that GDP fell in Q2 was largely due to Brexit-related distortions and those same distortions are likely to be supportive in Q3. Firms will soon have to start enacting no-deal contingency plans again, while there will also be a boost from car plants remaining open in August - the annual summer plant shutdowns were moved to April this year to coincide with a period when no deal disruption would have been at its height, had the UK left without a deal on the original date of 29 March.
- What will be the economy’s key growth drivers in the coming years?
We expect consumer spending and the public sector to be the key drivers [...]. It is clear that the new administration intends to follow a more expansionary path for fiscal policy, taking advantage of ultra-low borrowing costs. And if Brexit proves orderly, we expect to see sterling strengthen, which will [...] offer further support to household spending power. But we are gloomier about prospects for investment and exports. It is likely to be many years before the uncertainty around the UK-EU trading relationship is fully resolved, which will have a draining effect on capital spending plans. And with the global economy slowing and a stronger pound set to weigh on competitiveness, life is likely to get harder for exporters.
- Assuming an orderly Brexit, how will the UK’s potential growth rate be affected? How will the UK’s growth compare to European peers?
Absent Brexit, the outlook for potential growth is better for the UK than for most of its European peers because the UK has much stronger demographics. We expect to see the working age population contract in many European countries over the coming decade, whereas in the UK it should continue to grow – albeit more slowly than in the recent past – particularly if the state pension age continues to be increased. But ultimately, the Brexit outcome will be key. Our 2016 research suggested that the combination of a customs union (a similar arrangement to the backstop) and more restrictive immigration policies would result in the level of GDP being around 2% lower in 2030 than if the UK had remained in the EU. However, if the UK leaves the EU without a deal, the hit to GDP would be closer to 4%.
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.
Date: August 28, 2019
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