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This is no ‘Project Fear’ – our Brexit economy is faltering

Chancellor Phillip Hammond

Chancellor Phillip Hammond

The UK economy has slowed since the Brexit vote. This is long before Brexit actually takes place, which will cause a further sharp deceleration in the economy and significantly lower living standards.

The latest GDP data have been widely hailed as confounding the authors of ‘Project Fear’, including the former Chancellor George Osborne. His talk of an immediate recession on a Leave vote was clearly a foolish exaggeration. By contrast, the Bank of England’s sober assessment focused on the long-term and argued that growth and living standards would be significantly lower as a result of Brexit. The BoE’s assessment may be an under-estimate as it probably takes insufficient account of the depressing effect on investment.

The GDP data show a slowdown. In 2014 GDP grew by 3.1%, which slowed to 2.2% in 2015 and slowed again to 2% in 2016. In the final quarter of 2016 the preliminary estimate is that agriculture, construction and production combined contributed just 0.2% to growth. Instead, the economy is running on services, especially retail sales growth.

As prices are rising, there is a widespread assessment that consumers are spending at a rate far higher than income growth in a pre-emptive move against rising inflation in 2017. If so, consumers are probably right. Chart 1 shows the effect of changes in the value of the pound (using the Bank of England’s Sterling Trade-Weighted Index) on consumer prices. In this chart the consumer price inflation rate is lagged by 18 months, as changes in the value of the currently take their time to work through the economy. The Bank of England’s projection is that Inflation will rise to 2.8%. This would probably mean stagnant or even falling real wages once more. However, the last time the pound fell as sharply as after the Brexit vote, inflation rose to 5%. This would certainly mean sharply falling real wages.

Chart 1. Consumer prices and the pound
The rise in prices without a corresponding increase in wages means that the rise in retail sales and more generally in household consumption cannot last. But this is the main prop for the economy currently (Chart 2).
Chart 2. Largest and smallest quarter-on-quarter contributions of industries to headline GDP growth
Source: ONS
There is a widespread misconception that ‘demand’ can lead the economy, by which it is meant that rising Consumption will by itself lift Investment and so lead to rising GDP. The services sector ‘Distribution, hotels and restaurants’ grew by 5.4% in the 4th quarter of 2016 compared to the same period in 2015, while real wages are growing at little more than 1%. If the theory, widely supported by ‘keynesians’ although having little in common with Keynes, that Consumption could lead growth was correct, then this would be a positive development and we should expect growth to accelerate. The opposite is the case. Household savings are falling and growth will slow further. Notions of ‘consumption-led growth’ cannot explain the real world, where Consumption has been growing strongly and GDP growth has been slowing (chart 3).
Chart 3. Household Consumption and GDP Growth, Q4 2009 to Q4 2016

The previous Tory government introduced a series of measures to boost Consumption, ‘Help to Buy’ schemes and so on as part of its re-election campaign. The sharp slowdown in inflation also allowed real wages to rise very modestly from 2012 onwards. At this point, Consumption began to rise strongly, from around 0.5% annual growth to over 5%. However, GDP has not followed. Over the same period GDP growth has barely changed, rising from 1.5% to just over 2.2%.

Consumption-based services are among some of the lowest productivity sectors of the economy. The much weaker growth of manufacturing and industrial production at the same time means that employment patterns are changing in a negative way. In the 3 months following the referendum manufacturing and construction jobs combined have contracted by 60,000, having expanded by 136,000 in the 12 months prior to the referendum. Crucially, total hours worked for the whole economy have recorded the first fall since the stagnation of 2011.

Chart 4. Total Hours Worked (millions) January 2009 to October 2016
In the 12 months prior to the referendum total hours worked grew by 2%. In the 4 months’ data since then total hours have fallen by 0.2%. This should not be exaggerated. But it is widely understood that the crisis of the British economy is primarily expressed as a weakness of investment. This means that it is only possible for GDP to rise if there are more people in the workforce or if they are working longer hours, which is the recent experience. If hours worked stagnate or fall for a significant period, in an environment of weak investment then both GDP and living standards would fall.


It was a foolish exaggeration from the Tory leadership of the Remain campaign to suggest that the UK economy would immediately go into recession with a Leave vote. The negative effects of the Brexit vote provoked a sharp fall in the pound and interest rates were cut. These averted sharp slowdown, but the inflation effect will cut living standards.

The real effects of Brexit will be felt over the medium-term and will naturally be strongest only if and when Britain leaves the Single Market. Even so, it is clear that the economy is already faltering. 2016 GDP growth was weaker than in 2015 and in 2014. The economy is almost wholly reliant on services led by retail sales, which cannot be sustained.

Consumption cannot lead growth. The deepening imbalance in the economy is leading to job losses in manufacturing and construction, where there had been growth prior to the referendum. Worryingly, total hours worked have contracted in the near-term. If this persists in the continued absence of investment growth, a contraction in GDP and living standards would be almost unavoidable.

The Brexit vote is already leading to economic slowdown. Brexit itself will lead to job losses and lower living standards on a large scale.


  1. John Penney says:

    Dearie me, the usual, graph-laden , stuff from pro EU fanatic, Tom O’Leary, claiming to “prove” that leaving his beloved neoliberal enforcement machine of the EU , is demonstrably a disaster already. The trouble is, Tom, that your copious stats prove nothing of the sort !

    Tom’s stats would be perfectly valid if he was seeking to explain the various serious structural weaknesses of the UK economy, base on over 30 years of financialisation, deindustrialisation, deskilling, property bubbles, debt bubbles, destruction of manufacturing, no regional development policies, etc. But what the stats he provides don’t do, and can’t do, is “prove” anything about Brexit – because we haven’t even left yet !

    The EU fanatics like O’Leary were hoping for some sort of Brexit economic crisis immediately following the Referendum, but it didn’t happen. In fact it was never likely to happen – it was indeed just nonsense “project fear” baloney from the Remain side. The upsides and downsides of Brexit will take years to become clear, and staying in , or leaving, including in or out to the Single Market, the structural disfunctionality of our financialised, low skill, low wage, current economic model, will remain .

    Tom,s articles are always deeply dishonest , heaping up non sequitur arguments and duff statistics, which simply DON’T prove his arguments. Tom is an uncritical pro neoliberal EU fanatic. His dishonest little articles have no place on a Left Wing discussion site – other than to illustrate yet again that there are ” lies, lies, and statistics”.

  2. Rob Green says:

    The choice is this: Socialist Brexit or Far Right Brexit. Full-employment, a National Bank, socialisation of the means of production and exchange, workers’ democracy and a New European Settlement on the one side or a capitalist version of North Korea with a dash of Panama mixed in for good on the other. There is no point blaming Brexit for our economic woes. Britain voted Brexit because British capitalism or at least its domestic and petit bourgeois manifestations can no longer compete in Britain let alone the rest of the ESM. This is why Soft Brexit will be the short route to disintegration for the Labour Party. Ask Hillary Clinton how 90s neo-liberal throwbacks are getting on in electoral terms nowadays. Socialist Brexit on the other hand offers a way forward for the working class and the Labour Party. A tough way forward to be sure but a way forward. Labour may well end up with 40 or 50 MPs or even less but if that is the price for finally tackling the New Labour legacy both politically and in terms of personnel then so be it. It can then rebuild on a principled socialist basis. Unfortunately it does look increasingly clear that Corbyn and Co are going for Soft Brexit which will put them in an Unpopular Front with Lib Dems, pro-EU Tories, the Greens, the SNP, Bob Geldof, Richard Branson and Corporate Capitalism. This will end the party. At which point the need for the building of the revolutionary socialist alternative will come into sharp relief as the dead capitalist system continues to dissolve in its own acids. History will look back on this period, if there is anybody left to look back on this period, as The Great Dissolution of Capitalism and hopefully the victory of socialism.

    1. John Penney says:

      Whilst I think that, unfortunately, there is more chance of Leicester City winning this Year’s FA Cup, than that :

      “History will look back on this period, if there is anybody left to look back on this period, as The Great Dissolution of Capitalism and hopefully the victory of socialism.”

      but , unfortunately, I actually agree with David (!) that all the signs are that the Labour Party , as a bloc, from “Corbyn to Benn to Cooper” , from PLP, to Progress to Momentum, are going for a contrived “Soft Brexit” (ie, staying in the neoliberal rules enforcing Single Market/Customs Union) , whilst pontificating endlessly about “respecting the Referendum result” , in a vain hope to “keep in” with its overwhelming pro Brexit working class mass support in Labour heartlands .

      If this is indeed the emerging actual unified Labour “strategy” , as David says, we can wave goodbye to the Labour heartlands in the North East and Midlands in the 2020 General election.

      1. Rob Green says:

        Well I’m glad we agree. Sort of. However, sometimes jumping out of the frying pan just gets you burned up in the fire. Whilst Brexit was a response to the failure of UK capitalism and its inability to compete in the ESM any longer which meant that Remain was never really an option a Capitalist Brexit will be no less disastrous and will in fact simply accelerate the decay and dissolution of the already dead capitalist system. This is why there is only one option for the working class and that is Socialist Brexit and why Soft Brexit will destroy the party. We must portray Socialism now as the emergency measures the economy desperately needs if it is to be defended from the ravages of capitalist collapse. Perhaps we should remember why we are here: Socialism, socialism, socialism.

  3. James Martin says:

    Oh no, O’Leary’s back with more insulting tosh! Has the SEB really fallen so low that someone as bad as this gets regular space? Tom, if you are reading this son try writing some *socialist* economics articles for a change, we can get the liberal stuff elsewhere. What would a socialist government do Tom, what policies would be appropriate for public ownership and taking on international money market threats? What is the correct strategy for introducing workers control and at the other end consumer influence over production priorities? How could this be reflected in a Labour manifesto? Or are you really only capable of a love-in with the pro-privatisation economic liberalism of the EU bosses club, as all your awful articles on here to date would appear to indicate?

  4. Karl Stewart says:

    Why does this site publish the work of this capitalist, neo-liberal economist?

  5. Verity says:

    This is the only contributor on Left futures that now always avoid finding more important stuff to read. The more he writes the less credible his ‘projections’ become.

  6. C MacMackin says:

    I’m unconvinced that the data backs up all of Tom’s arguments. The correlation in Chart 1 isn’t very strong and I’d want to know if it has any statistical validity. A longer time-series would also help when judging that. Similarly, to know about the relationship between consumption and GDP, surely’ we’d need a chart going back much farther than the 7 years in Figure 3. The most that chart can tell us is that there hasn’t been a strong relationship in recent years.

    The most glaring issue, however, is with Chart 4. Tom claims that “total hours worked for the whole economy have recorded the first fall since the stagnation of 2011.” However, there were clearly similar falls in April and October 2012 and somewhat smaller falls in October 2013, Jully 2014, October 2014, January 2015, amd October 2015. The most recent fall seems to have lasted only one quarter, as there was some recover by the final data-point. It could signal the start of a downwards trend, but with the current data it could equally well be a blip like those in 2012. We won’t know for at least a few more months.

  7. Bazza says:

    Some of us warned trying to repeat Project Fear in the referendum (like they used in Scotland) would fail and this time Cameron had the Mail, Sun et against him!
    Of course £60b of quantitative easing post -referendum has calmed the waters and perhaps the old credit card and massive levels of personal debt is helping us to get by as people live for the day.
    I was for Remain as one potential but difficult framework to work with potential international partners to transform the EC in a left direction but this has now gone.
    We will be left as a potentialy independent nation state (but dominated by capital) and we can still work with our international left partners, so Brexit is now the only game in town and we need to get the best deal for working class/working people.
    But we could do an immediate deal on current EC migrants here having the Right to Remain as well our citizens in Spain, France, Germany etc.
    If we can transform the UK in a socialist direction we will still need to trade with the World so I see nothing wrong in a left government paying say £10b a year up front to the EC so UK companies get tariff free access to EC markets instead of each paying tariffs but I want us (and other countries) to control labour and capital supply to get power back from Neo-Liberal capitalism.
    That should be: the Deal or No Deal?
    I also go back to the point as internationalists shouldn’t we care too that a country like Bulgaria will have lost half of its poulation by 2020 and is it the role of the poorer EC countries to serve the rich in the richer countries; these poorer countries have also paid for the education and health of these working people all their lives and the migrant workers even pay their own fares to get to the UK etc. so as Watkins says in The New Left Review, “Capital wants everything for free.”
    It’s almost funny when the Right say take control of our country back, and apart from perhaps a house and a bit of garden what is ours? – the land, banks, mail, rail, water, public utilities, pharma, supermarkets, airlines etc. etc. and an Italian state railway has just joined the others running UK franchises – taking back control?
    And now their selling off the student loans company – THE TORIES GIVING BACK CONTROL TO NEO-LIBERALISM!
    And new Tory trade deals with probably secret courts for TNCs to take our Government to court -taking back control?
    We have to accept Brexit is the only game in town, and need to get the best out of it for working class/working people in the UK and elsewhere.

  8. David Pavett says:

    it is widely understood that the crisis of the British economy is primarily expressed as a weakness of investment. This means that it is only possible for GDP to rise if there are more people in the workforce or if they are working longer hours …

    Like several others I have a problem with articles like this. How does “weak investment” mean what is claimed? Even weak investment can include a component improving productivity thereby contributing to an increase in GDP without more people or longer hours. I am not sayibg that this is likely but just that TO’L’s argument doesn’t stand up.

    1. John Penney says:

      O’Leary doesn’t even seem to understand what the UK economic crisis is about ! It is the UK’s relative disastrously low PRODUCTIVITY compared to all our main international competitors that is the key problem, not GDP growth . GDP growth is a very poor indicator of a national economy’s overall health . For instance our GDP figures actually nowadays include a recently added category which roughly assesses the GDP element produced from prostitution and drug dealing ! GDP is massively boosted by , actually very harmful, nominal value adding things like property bubbles – but ignores the hollowing out of our industrial.manufacturing base , and our critically important ever declining productivity(ie output per man hour).

      GDP growth will indeed be boosted, for instance , by importing thousands of low skilled fruit pickers on starvation wages, to seasonally pick previously uneconomic crops, or by the recruitment of foreign workers to staff ever more coffee/wine bars in London. But the recruitment of ever more unskilled workers to staff ever more low mechanised , low value-added jobs, will actually WORSEN our UK productivity figures even more.

      GDP is a useless measure of our economic health. Which is why governments like to use it constantly to add a shine to our currently property and debt bubble driven , financialised , economy. Surely O’Leary knows this ? It is the surely the job of an interventionist Left government to break the now 15 year “investment strike” of UK business, by , if necessary, using company taxation to “nationalise” (and repatriate from speculative uses) their uninvested profits, and directly use this to fund a series of major investment programmes, aimed at both upgrading productive infrastructure, but business investment programmes too. For someone writing on a Left Wing site, O’Leary seems to have no grasp that the economic status quo CAN be changed by government action.

  9. Tim Pendry says:

    Speculative nonsense, I am afraid. The UK actually happens to be one of the strongest economies in the world and the problem is not Brexit but the risk of implosion in the Eurozone and any misdirection of Trump’s protectionism that affects the UK. One reason why the liberal Left’s determination to insult the new President strikes me as rather iresponsible.

    Truth is – we do not know what happens next and we never did. We do what we do and self-serving pseudo-scientific analyses are really not very helpful.

  10. Karl Stewart says:

    Why does Left Futures publish this capitalist neo-liberal economist?


    1. John Penney says:

      Because he’s rabidly anti Brexit perhaps , and gives a pseudo ” “dispassionate academic economic analysis ” gloss to all the still ongoing Project Fear bollocks that the Guardianista liberals constantly churn out ?

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