ricky2tricky4city
Steffen Freund
I'm off to have a conversation with @Spurs7891
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Politics, politics, politics (so long and thanks for all the fish)
- Thread starter SpurMeUp
- Start date
Can we please take this down a notch or three?
Thanks.
ricky2tricky4city
Steffen Freund
glorygloryeze
Tom Huddlestone
29 January 2020
The problem with the big ‘cost of Brexit’ numbers
By Julian Jessop
Ever since the 2016 referendum, economists have attempted to estimate what Brexit ‘has already cost’ the UK economy and households. It wouldn’t be a surprise to see some of the most depressing numbers dusted off this week to mark our departure from the EU. But all these studies should be taken with a large pinch of salt. It’s certainly wrong to regard them as gospel truth, or as a reliable warning of even worse to come.
There are two main approaches to answering the question of what impact the referendum result has already had. One is ‘top-down’, which looks at the overall performance of the UK economy compared to its peers, usually measured by headline GDP growth. The other is ‘bottom-up’, which focuses instead on specific indicators, notably inflation and investment, where it is relatively clear that the vote to leave has had a negative impact.
I’m not keen on the first of these approaches. Studies here typically rely on the ‘synthetic control’ method, which uses a computer algorithm to select a weighted combination of countries whose growth best matched that of the UK economy before the 2016 referendum. The actual performance of the UK economy since the referendum is then compared to this control group, or synthetic ‘doppelganger’, and the difference taken as a proxy for the impact of the vote for Brexit. In other words, the performance of the doppelganger is assumed to be the ‘counter-factual’ (or what would otherwise have happened) if the UK had voted to remain.
This approach is well explained in studies by the CEPR and John Springford at the Centre for European Reform (CER). Others using it include the investment bank UBS, the Bank of England’s Gertjan Vlieghe and the latest IFS Green Budget. These studies typically conclude that the level of UK GDP is now around 3% lower than it would otherwise have been, or a shortfall of around £60 billion a year.
Indeed, there are now so many of these studies that authors have had to come up with new ways of coming up with ever bigger numbers. The CEPR team has extrapolated their results forward, by using OECD forecasts, to predict that the output loss will increase to about 4% of GDP by the end of 2020.
Not to be outdone, Bloomberg (using a simpler method based on the past correlation between the UK and other G7 economies) has added up the annual figures to conclude that the accumulated cost of Brexit has already hit £130 billion, with a further £70 billion ‘set to be added by the end of this year’.
There are a number of problems with all these studies, including the sensitivity of the results to the choice of countries in the control group and the weights assigned to them. Successive iterations of the CER model have required some large changes in order to ensure a good fit. But the biggest weakness is the assumption that all the difference in the relative performance of the UK since 2016 is due to Brexit, rather than other unrelated factors affecting the UK or the control group.
In reality, there may be some very good reasons why the UK would have slipped down the growth league tables anyway, regardless of the outcome of the 2016 referendum. Much as I’d like to think otherwise, the UK isn’t normally the strongest economy in the G7, and some eurozone economies in particular were due a period of catch up.
What’s more, any international comparison is usually dominated by what has happened in the US, where the economy has recently benefited from a substantial fiscal boost under President Trump. In contrast, UK GDP has grown at roughly the same pace as Germany since 2016, and actually outperformed Germany over the last two years.
To be fair, John Springford at least has acknowledged this point. The latest (and final) CER report noted that excluding the US from the analysis reduced the estimated hit to UK GDP from 2.9% to 2.2%, while excluding Germany (and thus increasing the weight on the US) increased it to 3.4%. But that’s a substantial margin of error.
I therefore think it makes more sense to adopt a ‘bottom-up’ approach. There is no doubt that the UK economy has been held back since 2016 by Brexit uncertainty in two main ways. But again, most studies are too pessimistic.
One of these channels is the inflationary impact of the fall in the pound. For example, economists at the LSE have suggested that this has increased consumer prices by 2.9%, costing the average household £870 per year. There’s a lot of sophisticated analysis behind this, but in the end all they have done is take 0.29 (an estimate of the share of imports in UK consumer expenditure) and multiply it by 10% (an estimate of the fall in an import-weighted sterling exchange rate index).
In my opinion, this is at the upper end of what’s plausible. The study assumes that higher import costs are passed on in full to consumers and that they are unable to avoid them by switching to domestic goods and services. It also ignores other channels through which the fall in the exchange rate might have had a positive impact on the economy and on at least some households, including the boosts to competitiveness and asset prices. But my main objection is the assumption that the fall in the exchange rate is permanent.
Ever since the 2016 referendum, economists have attempted to estimate what Brexit ‘has already cost’ the UK economy and households. It wouldn’t be a surprise to see some of the most depressing numbers dusted off this week to mark our departure from the EU. But all these studies should be taken with a large pinch of salt. It’s certainly wrong to regard them as gospel truth, or as a reliable warning of even worse to come.
There are two main approaches to answering the question of what impact the referendum result has already had. One is ‘top-down’, which looks at the overall performance of the UK economy compared to its peers, usually measured by headline GDP growth. The other is ‘bottom-up’, which focuses instead on specific indicators, notably inflation and investment, where it is relatively clear that the vote to leave has had a negative impact.
I’m not keen on the first of these approaches. Studies here typically rely on the ‘synthetic control’ method, which uses a computer algorithm to select a weighted combination of countries whose growth best matched that of the UK economy before the 2016 referendum. The actual performance of the UK economy since the referendum is then compared to this control group, or synthetic ‘doppelganger’, and the difference taken as a proxy for the impact of the vote for Brexit. In other words, the performance of the doppelganger is assumed to be the ‘counter-factual’ (or what would otherwise have happened) if the UK had voted to remain.
This approach is well explained in studies by the CEPR and John Springford at the Centre for European Reform (CER). Others using it include the investment bank UBS, the Bank of England’s Gertjan Vlieghe and the latest IFS Green Budget. These studies typically conclude that the level of UK GDP is now around 3% lower than it would otherwise have been, or a shortfall of around £60 billion a year.
Indeed, there are now so many of these studies that authors have had to come up with new ways of coming up with ever bigger numbers. The CEPR team has extrapolated their results forward, by using OECD forecasts, to predict that the output loss will increase to about 4% of GDP by the end of 2020.
Not to be outdone, Bloomberg (using a simpler method based on the past correlation between the UK and other G7 economies) has added up the annual figures to conclude that the accumulated cost of Brexit has already hit £130 billion, with a further £70 billion ‘set to be added by the end of this year’.
(Part one of two)
The problem with the big ‘cost of Brexit’ numbers
By Julian Jessop
Ever since the 2016 referendum, economists have attempted to estimate what Brexit ‘has already cost’ the UK economy and households. It wouldn’t be a surprise to see some of the most depressing numbers dusted off this week to mark our departure from the EU. But all these studies should be taken with a large pinch of salt. It’s certainly wrong to regard them as gospel truth, or as a reliable warning of even worse to come.
There are two main approaches to answering the question of what impact the referendum result has already had. One is ‘top-down’, which looks at the overall performance of the UK economy compared to its peers, usually measured by headline GDP growth. The other is ‘bottom-up’, which focuses instead on specific indicators, notably inflation and investment, where it is relatively clear that the vote to leave has had a negative impact.
I’m not keen on the first of these approaches. Studies here typically rely on the ‘synthetic control’ method, which uses a computer algorithm to select a weighted combination of countries whose growth best matched that of the UK economy before the 2016 referendum. The actual performance of the UK economy since the referendum is then compared to this control group, or synthetic ‘doppelganger’, and the difference taken as a proxy for the impact of the vote for Brexit. In other words, the performance of the doppelganger is assumed to be the ‘counter-factual’ (or what would otherwise have happened) if the UK had voted to remain.
This approach is well explained in studies by the CEPR and John Springford at the Centre for European Reform (CER). Others using it include the investment bank UBS, the Bank of England’s Gertjan Vlieghe and the latest IFS Green Budget. These studies typically conclude that the level of UK GDP is now around 3% lower than it would otherwise have been, or a shortfall of around £60 billion a year.
Indeed, there are now so many of these studies that authors have had to come up with new ways of coming up with ever bigger numbers. The CEPR team has extrapolated their results forward, by using OECD forecasts, to predict that the output loss will increase to about 4% of GDP by the end of 2020.
Not to be outdone, Bloomberg (using a simpler method based on the past correlation between the UK and other G7 economies) has added up the annual figures to conclude that the accumulated cost of Brexit has already hit £130 billion, with a further £70 billion ‘set to be added by the end of this year’.
There are a number of problems with all these studies, including the sensitivity of the results to the choice of countries in the control group and the weights assigned to them. Successive iterations of the CER model have required some large changes in order to ensure a good fit. But the biggest weakness is the assumption that all the difference in the relative performance of the UK since 2016 is due to Brexit, rather than other unrelated factors affecting the UK or the control group.
In reality, there may be some very good reasons why the UK would have slipped down the growth league tables anyway, regardless of the outcome of the 2016 referendum. Much as I’d like to think otherwise, the UK isn’t normally the strongest economy in the G7, and some eurozone economies in particular were due a period of catch up.
What’s more, any international comparison is usually dominated by what has happened in the US, where the economy has recently benefited from a substantial fiscal boost under President Trump. In contrast, UK GDP has grown at roughly the same pace as Germany since 2016, and actually outperformed Germany over the last two years.
To be fair, John Springford at least has acknowledged this point. The latest (and final) CER report noted that excluding the US from the analysis reduced the estimated hit to UK GDP from 2.9% to 2.2%, while excluding Germany (and thus increasing the weight on the US) increased it to 3.4%. But that’s a substantial margin of error.
I therefore think it makes more sense to adopt a ‘bottom-up’ approach. There is no doubt that the UK economy has been held back since 2016 by Brexit uncertainty in two main ways. But again, most studies are too pessimistic.
One of these channels is the inflationary impact of the fall in the pound. For example, economists at the LSE have suggested that this has increased consumer prices by 2.9%, costing the average household £870 per year. There’s a lot of sophisticated analysis behind this, but in the end all they have done is take 0.29 (an estimate of the share of imports in UK consumer expenditure) and multiply it by 10% (an estimate of the fall in an import-weighted sterling exchange rate index).
In my opinion, this is at the upper end of what’s plausible. The study assumes that higher import costs are passed on in full to consumers and that they are unable to avoid them by switching to domestic goods and services. It also ignores other channels through which the fall in the exchange rate might have had a positive impact on the economy and on at least some households, including the boosts to competitiveness and asset prices. But my main objection is the assumption that the fall in the exchange rate is permanent.
Ever since the 2016 referendum, economists have attempted to estimate what Brexit ‘has already cost’ the UK economy and households. It wouldn’t be a surprise to see some of the most depressing numbers dusted off this week to mark our departure from the EU. But all these studies should be taken with a large pinch of salt. It’s certainly wrong to regard them as gospel truth, or as a reliable warning of even worse to come.
There are two main approaches to answering the question of what impact the referendum result has already had. One is ‘top-down’, which looks at the overall performance of the UK economy compared to its peers, usually measured by headline GDP growth. The other is ‘bottom-up’, which focuses instead on specific indicators, notably inflation and investment, where it is relatively clear that the vote to leave has had a negative impact.
I’m not keen on the first of these approaches. Studies here typically rely on the ‘synthetic control’ method, which uses a computer algorithm to select a weighted combination of countries whose growth best matched that of the UK economy before the 2016 referendum. The actual performance of the UK economy since the referendum is then compared to this control group, or synthetic ‘doppelganger’, and the difference taken as a proxy for the impact of the vote for Brexit. In other words, the performance of the doppelganger is assumed to be the ‘counter-factual’ (or what would otherwise have happened) if the UK had voted to remain.
This approach is well explained in studies by the CEPR and John Springford at the Centre for European Reform (CER). Others using it include the investment bank UBS, the Bank of England’s Gertjan Vlieghe and the latest IFS Green Budget. These studies typically conclude that the level of UK GDP is now around 3% lower than it would otherwise have been, or a shortfall of around £60 billion a year.
Indeed, there are now so many of these studies that authors have had to come up with new ways of coming up with ever bigger numbers. The CEPR team has extrapolated their results forward, by using OECD forecasts, to predict that the output loss will increase to about 4% of GDP by the end of 2020.
Not to be outdone, Bloomberg (using a simpler method based on the past correlation between the UK and other G7 economies) has added up the annual figures to conclude that the accumulated cost of Brexit has already hit £130 billion, with a further £70 billion ‘set to be added by the end of this year’.
(Part one of two)
glorygloryeze
Tom Huddlestone
(Part two)
There are a number of problems with all these studies, including the sensitivity of the results to the choice of countries in the control group and the weights assigned to them. Successive iterations of the CER model have required some large changes in order to ensure a good fit. But the biggest weakness is the assumption that all the difference in the relative performance of the UK since 2016 is due to Brexit, rather than other unrelated factors affecting the UK or the control group.
In reality, there may be some very good reasons why the UK would have slipped down the growth league tables anyway, regardless of the outcome of the 2016 referendum. Much as I’d like to think otherwise, the UK isn’t normally the strongest economy in the G7, and some eurozone economies in particular were due a period of catch up.
What’s more, any international comparison is usually dominated by what has happened in the US, where the economy has recently benefited from a substantial fiscal boost under President Trump. In contrast, UK GDP has grown at roughly the same pace as Germany since 2016, and actually outperformed Germany over the last two years.
To be fair, John Springford at least has acknowledged this point. The latest (and final) CER report noted that excluding the US from the analysis reduced the estimated hit to UK GDP from 2.9% to 2.2%, while excluding Germany (and thus increasing the weight on the US) increased it to 3.4%. But that’s a substantial margin of error.
I therefore think it makes more sense to adopt a ‘bottom-up’ approach. There is no doubt that the UK economy has been held back since 2016 by Brexit uncertainty in two main ways. But again, most studies are too pessimistic.
One of these channels is the inflationary impact of the fall in the pound. For example, economists at the LSE have suggested that this has increased consumer prices by 2.9%, costing the average household £870 per year. There’s a lot of sophisticated analysis behind this, but in the end all they have done is take 0.29 (an estimate of the share of imports in UK consumer expenditure) and multiply it by 10% (an estimate of the fall in an import-weighted sterling exchange rate index).
In my opinion, this is at the upper end of what’s plausible. The study assumes that higher import costs are passed on in full to consumers and that they are unable to avoid them by switching to domestic goods and services. It also ignores other channels through which the fall in the exchange rate might have had a positive impact on the economy and on at least some households, including the boosts to competitiveness and asset prices. But my main objection is the assumption that the fall in the exchange rate is permanent.
URL: https://capx.co/the-problem-with-the-big-cost-of-brexit-numbers/
There are a number of problems with all these studies, including the sensitivity of the results to the choice of countries in the control group and the weights assigned to them. Successive iterations of the CER model have required some large changes in order to ensure a good fit. But the biggest weakness is the assumption that all the difference in the relative performance of the UK since 2016 is due to Brexit, rather than other unrelated factors affecting the UK or the control group.
In reality, there may be some very good reasons why the UK would have slipped down the growth league tables anyway, regardless of the outcome of the 2016 referendum. Much as I’d like to think otherwise, the UK isn’t normally the strongest economy in the G7, and some eurozone economies in particular were due a period of catch up.
What’s more, any international comparison is usually dominated by what has happened in the US, where the economy has recently benefited from a substantial fiscal boost under President Trump. In contrast, UK GDP has grown at roughly the same pace as Germany since 2016, and actually outperformed Germany over the last two years.
To be fair, John Springford at least has acknowledged this point. The latest (and final) CER report noted that excluding the US from the analysis reduced the estimated hit to UK GDP from 2.9% to 2.2%, while excluding Germany (and thus increasing the weight on the US) increased it to 3.4%. But that’s a substantial margin of error.
I therefore think it makes more sense to adopt a ‘bottom-up’ approach. There is no doubt that the UK economy has been held back since 2016 by Brexit uncertainty in two main ways. But again, most studies are too pessimistic.
One of these channels is the inflationary impact of the fall in the pound. For example, economists at the LSE have suggested that this has increased consumer prices by 2.9%, costing the average household £870 per year. There’s a lot of sophisticated analysis behind this, but in the end all they have done is take 0.29 (an estimate of the share of imports in UK consumer expenditure) and multiply it by 10% (an estimate of the fall in an import-weighted sterling exchange rate index).
In my opinion, this is at the upper end of what’s plausible. The study assumes that higher import costs are passed on in full to consumers and that they are unable to avoid them by switching to domestic goods and services. It also ignores other channels through which the fall in the exchange rate might have had a positive impact on the economy and on at least some households, including the boosts to competitiveness and asset prices. But my main objection is the assumption that the fall in the exchange rate is permanent.
URL: https://capx.co/the-problem-with-the-big-cost-of-brexit-numbers/
Rorschach
Sonny Walters
Ha.
glorygloryeze
Tom Huddlestone
UK economy close to turning point on eve of leaving EU
Confidence rising three and a half years after Brexit vote but tight timescale for trade deal could harm recovery
https://www.theguardian.com/busines...y-close-to-turning-point-on-eve-of-leaving-eu
Business confidence surges as 'Boris boom' comes to life
https://www.telegraph.co.uk/business/2020/01/30/business-confidence-surges-boris-boom-comes-life/ (requires account sign-up to see full article)
Business leaders back Britain after Brexit as City gets ready for £100bn deals spree
Business set to move up a gear after the UK leaves the European Union tomorrow
https://www.telegraph.co.uk/busines...ck-britain-thrive-outside-eu-city-gets-ready/ (requires account sign-up to see full article)
UK hiring confidence climbs after election
https://www.cityam.com/uk-hiring-confidence-climbs-after-election/
Confidence rising three and a half years after Brexit vote but tight timescale for trade deal could harm recovery
https://www.theguardian.com/busines...y-close-to-turning-point-on-eve-of-leaving-eu
Business confidence surges as 'Boris boom' comes to life
https://www.telegraph.co.uk/business/2020/01/30/business-confidence-surges-boris-boom-comes-life/ (requires account sign-up to see full article)
Business leaders back Britain after Brexit as City gets ready for £100bn deals spree
Business set to move up a gear after the UK leaves the European Union tomorrow
https://www.telegraph.co.uk/busines...ck-britain-thrive-outside-eu-city-gets-ready/ (requires account sign-up to see full article)
UK hiring confidence climbs after election
https://www.cityam.com/uk-hiring-confidence-climbs-after-election/
Grays_1890
Chris Jones
Apologies to you
SpurMeUp
Les Howe
A decent blog article. Thanks for posting. Will have a closer read over the weekend. The above I don't agree with though. The UK went from top of the list of fastest-growing G7 economies to the slowest. The only major event in that time was brexit. What else happened? These kinds of articles just shows how complex economics and forecasting is. Anyone who questions these forecasts and justifies it is alright in my book. No one can possible know for sure the outcomes of brexit, especially since we don't know what type of brexit we'll get over the next year (or likely a year and a bit).
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I think the more important question is how often does the UK move up and down that list? I suspect it's fairly often.
@SpurMeUp - Can you stop using Japanese car manufacturers as fact to back up your opinion, they are moving production back to Japan because the new EU trade deal means there's none (or very small tariffs) on exporting cars from Japan to the EU so it doesn't make sense to continue producing them in the EU. This could be an example of free trade being bad.
SpurMeUp
Les Howe
I agree. However, that is something that has likely been accelerated by Brexit. Generally, these complex decisions are rarely just one variable. There is also the question over whether such an EU trade agreement would have been approved by the UK (in Europe) if it lost UK jobs. I think the logic is, the trade agreement opens up more to the UK in exports to Japan than it closes down (if we were in the EU). Hopefully, we can get a similar trade agreement directly with Japan.
Maybe you can be open to see both sides not just 'your side'?
Here you might like this https://www.theguardian.com/politic...s-chance-to-fix-uk-economy-long-term-problems
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We were still in the EU when the decision was made - that didn't stop it.
SpurMeUp
Les Howe
The EU-Japan free trade agreement was signed almost exactly 2 years after the country voted out. Yes technically we were still in the EU but we’re not going to be rejecting their trade deals while we’re exiting.
Sitting on my porcelain throne using glory-glory.co.uk mobile app
Parklaner81
Steve Hodge
Nice try, but spurmeup has found a single point in the data that fits his argument. Therefore, that is the only submission that is allowable on this topic.
We still had the same vote as we had before the process started. The EU ignoring our votes and blanking out our veto is nothing new - it's been happening from the start.
Gilzeantoscore
Justin Edinburgh
Fifty pounds of brick in a five pound bag.
I am open to all sides and opinions, just pointing out some details which you seem to agree with.
I appreciate your views but you only express economic viewpoints, for some people they like the feeling of the UK being in control, ability to vote polticians out when things happen they don't like etc. If everyone was all about money then why not just continue burning coal, having huge oil corporations and allow fracking everywhere. It's a complex argument which for many is economic but for others might be something else.