LONDON – This is about as close as any member of Theresa May’s government is going to admit that Brexit is going to hurt economic growth in the
In Davos last week, Chancellor of the Exchequer Philip Hammond admitted that he believed consumer demand would decline this year as inflation kicked in, making prices more expensive in Britain compared to Europe.
That, in turn, would hurt economic growth, he said. Here is what he told the World Economic Forum specifically (you can
see a video of it at the 11:00 mark here
“The UK economy has been resilient in 2016, confounding many sceptics who believed that we would face an immediate and negative response in the economy to the Brexit referendum. In fact, we end 2016 as the fastest-growing of the large developed economies. Much of that has depended on consumer demand, consumer demand remaining very strong.
And as I’ve said the currency depreciation is now feeding through into inflation, which will increasingly affect consumer behaviour during this year – hence the lower forecast for economic growth in 2017 as that inflation effect takes place.”
There is a lot to parse there but for anyone who understands economics – ie the audience he was addressing – there is only one way to interpret that statement: Brexit will reduce economic growth and make Britain poorer. Here is why we know that to be true.
Let’s take it line by line:
- “We end 2016 as the fastest-growing of the large developed economies.”
– That’s mostly true.
- “Much of that has depended on consumer demand, consumer demand remaining very strong.”
– So far, so good.
“Currency depreciation is now feeding through into inflation.”
This is Hammond admitting that Brexit triggered a devaluation of the pound. That devaluation makes goods priced in dollars and euros more expensive for British money to buy, and prices are now going up. This is important because increasing prices are the most direct and immediate way that British people will get poorer.
“Which will increasingly affect consumer behaviour during this year.”
– In other words, those higher prices will weaken consumer demand, the very thing Hammond just said was fuelling growth.
- “Hence the lower forecast for economic growth in 2017 as that inflation effect takes place.”
– This is a reference to his autumn budget statement, which said that growth in 2016 was 2.1% but would be only 1.4% in 2017 and 1.7% in 2018. Hammond states it here as if was some sort of neutral economic function of inflation, when it is actually a political choice by his government with negative consequences for jobs and growth.
There is no other reasonable interpretation of this statement, and it is interesting that Hammond phrased it this way rather than in layman’s terms: Prices are going up, we’re getting poorer, and this is going to hurt growth.