The 2016 Financial Times economists’ survey:my answers

The Financial Times (£; free reg) has just published its annual survey of UK economists’ views of prospects for the year ahead.  As ever, before looking at what we think might happen this year, it’s worth looking at what we said last year.  My answers in full from last year are here.  The headline one on growth was this:

Q.  Will Britain’s economy sustain a decent pace of economic growth in 2015?

A. The central expectation is that it will, if by decent is meant 2-3 per cent. That would represent trend growth but little catch up from the very large fall relative to trend between 2008 and 2012. That per capita GDP is still below 2008 levels 7 years on and 2 years into “recovery” is historically unprecedented.

In common with most of my colleagues, I was pretty accurate on this and most of the other testable predictions, although this was perhaps not particularly demanding.  As the FT also points out, most of us got the path of interest rates wrong again (and my forecast below is probably already out of date – spring is now probably too early). 

Turning to this year, the most interesting answers, individually and collectively, are those to the question about the impact of Brexit.  The FT summed this up as follows:

Regardless of the UK prime minister’s renegotiation of Britain’s terms of EU membership, most of the more than 100 economists thought economic prospects following a Brexit would be hit if voters decided to leave. Some 76 economists thought leaving the EU would harm the prospects with only eight thinking the outlook would be better outside the EU and 18 believing it would make little difference

So if it were up to the economists, we wouldn’t be having a renegotiation (hardly any of us think it will make any material difference to anything) and the result of the referendum would, overwhelmingly, be “Remain”. [For my views on the economics of Brexit, see below). 

Anyway, here are my answers to this year’s survey.

Q1: Economic prospects: How easily will Britain’s economy secure a third decent year of growth? Please explain your thinking

The premise is odd. In anything remotely resembling a “”normal”” recovery, we should have had several years of growth significantly above trend; as it is, both output and real wages remain far below the pre-crisis trend, in contrast with previous recoveries. Of course, this is not just a UK phenomenon.  

Looking forward, my central expectation is for growth to slow slightly, but not sharply. On the upside, continued low oil prices could boost real wages; on the downside, however, there a number of obvious and serious risks, both domestic (the persistently large, albeit probably overstated, current account deficit) and global.  

Q2: Brexit: If the British electorate vote to leave the EU in 2016, how would that: a) change your views about prospects for next year? b) Change your views about medium-term prospects?

I’d divide this into three:

a) short-term: relatively little visible impact. No doubt there would be some turbulence in financial markets, but I doubt we’d see much impact on the real economy in the very short-term (ie next year).

b) medium-term (ie the period of the negotiation over terms of exit and post-exit relationship between the EU and the UK, lasting at least 2 years). Significantly negative. These negotiations would be protracted, complex and probably acrimonious, leading to considerable uncertainty for both UK companies trading with the EU and international investors (not to mention EU citizens resident in the UK and vice versa). All this would be likely to have a substantial and negative impact on business confidence, business investment, FDI, and possibly trade and migration.

c) longer-term (post the negotiations and any transition) — impossible to forecast with any precision at this point, given we have very little idea of what the outcome of the negotiations in b) would be. The UK could undoubtedly survive and prosper outside the EU, and in some respects (flexibility on some aspects of trade and migration policy and regulation, reduced contributions to the EU budget) might benefit; but there are obvious and serious risks, in particular to trade in services (including financial services) which are vital to the UK economy and will become even more so in the next few decades.

Q3. What is your greatest concern about the balance of Britain’s recovery? To what extent will that balance improve by the end of 2016?

All the major imbalances in the UK economy (the dominance of London/South East; our poor export performance; the dysfunctional nature of the housing market; overreliance on financial services) remain at least as bad as in the pre-crisis period. There is no obvious reason why any of that should change in the next year.

Q4. Monetary policy. Please explain why you think monetary policy will be tighter or looser by the end of 2016. How much will it change?

My central expectation is that the Bank of England will raise rates early next year, but then, as the economy weakens slightly, will keep them on hold for the rest of the year.

Q5. Fiscal policy: Please explain which of the below statements is closest to your views.  George Osborne will:

a) struggle to impose his planned spending cuts and revenues will fall short of expectations 
b) struggle to impose his planned spending cuts but revenues will remain on target or better 
c) succeed in cutting spending, but revenues will fall short 
d) succeed in cutting spending and revenues will remain on target or better

c) succeed in cutting spending, but revenues will fall short      

In 2016 it should not be too difficult to deliver the spending cuts. After that, however, it will be much harder, especially in NHS/social care, where the Spending Review plans appear clearly inadequate (there is absolutely no plausible economic rationale for reducing health and care spending as a %age of GDP in a society which is growing older and richer). However, a softer economy, if it materialises, will hit revenues (although again not necessarily in 2016 to any material extent).

Q6.  Housing.  What effect are government policies likely to have on the housing supply and demand in 2016? How much will they contribute to likely changes in house prices?

New government policies are likely to have relatively marginal impacts on supply and demand in 2016; developments in the wider economy will be more important. More broadly, of course the failure of successive government to increase housing supply over the past 20 years has been very damaging; and this government has made things worse by ill-judged measures that primarily increase demand, although the most recent tweaks to policy have been somewhat more oriented to boosting supply, which is welcome.