IT was Voltaire who said: “Uncertainty is an uncomfortable position. But certainty is an absurd one.”
The UK economy has been unexpectedly resilient post Brexit. Most professional economists predicted that the UK would fall into recession should the electorate vote to exit the EU. Many of these economists, not unreasonably, argued that nothing has changed yet – the uncertainty, instrumental in crimping private sector decision-making, will likely not crystallise sufficiently until Article 50 is finally invoked. To what extent should we still listen to these economists?
Assuming that the government triggers Article 50, the UK will have just two years to negotiate a new trade agreement with the EU before being forced out of the single market. Canada’s free-trade deal with the EU was seven years in the making and is still not yet in force and this is with the two sides of the negotiating table trying to row in the same direction.
It would be surely wise to assume that, as Prime Minister Theresa May suggested, the UK may well be falling back on World Trade Organisation (WTO) rules in two years’ time. In short, we should probably work on the assumption that there is more uncertainty in the pipeline for the UK economy.
Uncertainty is, of course, hard to measure and even harder (stranger) to predict. However, it can affect an economy through multiple channels.
Households increase savings — and so reduce consumption, while firms delay investment spending and hiring. Sometimes, additional temporary workers could be preferred to more costly and irreversible capital investment. Uncertainty can even affect the economy’s supply-side potential, by delaying the entry and expansion of productive firms for example.
This is part of the reason that we have long argued that Brexit would likely provide a headwind for the UK economy. We have, nonetheless, steered clear of the more apocalyptic forecasts touted by many. The UK’s institutions, rule of law and relatively attractive demographic profile will likely continue to make this an attractive place for businesses to establish themselves once the dust has settled.
Of course, the process of disentangling the country from 44 years of economic entanglement with the neighbouring economic behemoth is likely to provide a challenging backdrop for a private sector that craves visibility and stability. However, uncertainty is a nebulous concept and can take many forms – geopolitical, economic, policy – and not all will have the same impact on the economy.
Ultimately, the task of measuring uncertainty is a challenge fraught with uncertainty itself. Forecasting the causal impact of uncertainty on the economy is harder still. Until these challenges can be adequately overcome – and one wonders whether this will ever be the case – accurately predicting the effects of a political shock such as Brexit may always be elusive.
:: Jonathan Dobbin (jonathan.dobbin@barclays.com) is head of wealth and investment management NI at Barclays. He can be contacted on 028 9088 2925.
