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As Britain’s vote on EU membership approaches, campaigners on both sides of the battle lines are deploying economic forecasts as weapons. The Remain camp can now point to a sheaf of academic studies — by the Treasury, International Monetary Fund, OECD and others — concluding that the UK economy will be smaller in the long run in every plausible scenario following a vote to leave. Supporters of Brexit dismiss these arguments as “Project Fear”, accusing the establishment of trying to spook the public into quiescence. Anyone who believes the fears to be unfounded, however, should take a closer look at what is happening on the ground.
Growth in the UK economy — until recently, among the strongest in the developed world — has all but ground to a halt. Surveys released this week of manufacturing, construction and the all-important services sector are consistent with output growth of a mere 0.1 per cent in the second quarter. Business investment has dropped, growth in employment has slowed and consumer confidence is at a 15-month low, with people more downbeat about the prospects for the economy even when they feel comfortable about their own financial position.
Of course there are other factors in play besides the referendum, ranging from global uncertainties around Chinese growth and oil prices, to the introduction of the national living wage. But it is striking that the UK is slowing abruptly just as economists expect a rebound in the US economy and a revival even in the fragile eurozone. Moreover, surveys, official data and a wealth of anecdotal evidence suggest that businesses and households are seeking to delay decisions until after the referendum.
The malaise pervades all sectors. Lawyers and consultants say their clients are reluctant to hire or invest. City headhunters say the annual spree of job moves that follows bonus payments has been muted. Retailers are warning of a wider slowdown. The Bank of England has called attention to a slump in commercial real estate — especially acute in London, where foreign investors play a central role. The residential market is also suffering; for the first time since 2008, estate agents surveyed by the Royal Institution of Chartered Surveyors expect a fall in sales.
None of this should be surprising. Uncertainty is almost always bad for economic activity and the Brexit vote introduces extreme uncertainty into almost every aspect of Britain’s economic life. Whatever its outcome, businesses face a period of political and financial turbulence. Pressing public policy decisions are on hold, subordinated to the needs of the campaign, and the pound moves in tandem with the latest polls. Even if the UK opts to remain, it will take time for normal business to resume. If it votes to leave, companies can expect an immediate sharp downturn followed by years of negotiations to redefine Britain’s relations with its main trading partners.
Many business leaders have been reluctant to take sides publicly in the referendum campaign, wary of alienating customers or clients. The actions they are taking to protect their companies in the event of Brexit testifies to the private fears they entertain about Britain leaving the EU. They should not see this as an excuse to refrain from speaking out publicly.
Brexit would inflict immense costs on the economy. This is no longer in doubt. Chief executives are right to prepare for the consequences if the UK decides to leave. But in the days ahead, while the vote still hangs in the balance, they should make a full-throated contribution to the national debate.