2017 is the year Brexit will properly begin, but its effects are already being felt. Depending on who you ask, Brexit is shaping up to be either extremely good or apocalyptically bad for the country. Economically speaking, the situation is looking okay at this current moment, but there are signs of a typically British problem – an out of control consumer boom – lurking on the horizon.
It is hard to deny that the economy has currently taken the Brexit vote largely in its stride. Unemployment is at its lowest rate since 2005 (4.8%). Retail sales are surging – in October, we saw a 14-year high of 7.2% in retail sales growth – and companies are continuing to invest in the country. We’ve seen a deal struck with Nissan to stay here, and McDonald’s has announced that it is moving its European headquarters to London.
Now, some economists have shifted their tone, saying that predictions of economic catastrophe will still come true after Article 50 is triggered, and perhaps that is true.
However, two things suggest otherwise. Firstly, the poor quality of the predictions for the immediate post-Brexit period (the need for a punishment Budget and the immediate recession being frequently cited ones). And secondly, that the signs seem to point to a completely different potential risk arising – the aforementioned boom. To understand why, we need to head back to June 2016.
Let’s think about the immediate aftermath of the recession. Due to the expectations of disaster, the Bank of England halved interested rates to 0.25%. It restarted quantitative easing, adding another £70 billion to the economy. Elsewhere, the pound devalued, hitting $1.18 against the dollar at its lowest point, and the government formally abandoned austerity. All these things were primed and ready to help stimulate our economy now that it was going to fall into deep trouble.
But here’s the thing – it didn’t.
Before the vote, the economy was growing at an annual rate of 2%, and there were suggestions that it would accelerate even more. Tariffs around the world are low, so there was no real reason to expect a massive slowdown after a leave vote. But because of the threats of economic doom, massive monetary stimuli were thrown at the economy when it wasn’t warranted. And thus, we are faced with the risk of a runaway consumer boom.
Britain has form in this field. Both the Barber boom of the 1970s and the Lawson boom of the late 1980s followed a similar pattern – the economy was overstimulated, creating a bubble which burst, as all bubbles must. Now, we’re seeing signs of the same thing happening all over again. The growth of consumer debt has doubled over the past three years, and the households saving ratio is falling. The trade deficit has widened to 6% of GDP, and that’s down to an increase in imports rather than a growth in exports. The British consumer doesn’t care about whether their employer moves to another country after Brexit; rather, they feel good about the future and are enjoying themselves by spending.
How does this end? Based on experience, it would seem rising consumer spending, a gradual build-up of inflation and, eventually, lots of lending from the banks as rising prosperity looks increasingly certain. And then, possibly, a crash in 2018 or 2019.
But then, possibly not – this is an assumption based on track records, and 2016 has poured cold water on their value. All Brexit financial forecasts are purely speculative, and the playing field may shift again after March. All I can really say is, if you’re worried, why not join your countrymen and go buy something instead?