The IFS's calculations are spurious at best
Another day, another economist trying to rewrite history to convince us that yes, all those forecasts of immediate doom if Britain voted to leave the EU were on the money after all. On the Today programme yesterday, Paul Johnson, director of the Institute for Fiscal Studies (IFS), made the ear-catching claim that the UK economy is now £60 billion smaller than it would have been had we voted to remain in the EU – a claim which went unchallenged.
The IFS tends to avoid making specific forecasts but this figure could be said to coincide with what Johnson wrote a fortnight before the 2016 referendum: “the immediate impact could be seismic… In the short run a vote for Brexit would create uncertainty. In the immediate aftermath the pound, and probably the stock market, would dive, making us all poorer. Investment and consumption would fall, and the economy would suffer”.
In reality, the FTSE 100 index, after an initial plunge, recovered strongly and is now around 850 points higher than the 6337 at which it closed on referendum day. But not let’s quibble. That the economy has apparently shed £60 billion of value is a serious business. The message is this: those 'experts', so reviled by Michael Gove were right all along, and we were foolish to be sceptical.
But how strong is the evidence that the UK economy is now £60 billion smaller than it would have been had we voted to remain? Paul Johnson’s claim comes from the IFS 'green budget' published yesterday morning. The paper claims that “UK economic weakness has been both more longstanding and more extensive than in other major economies” and includes a graph which appears to confirm that point – showing UK growth, post 2016, plunging below that of a basket of other ‘advanced economies’, which it defines as the US, Japan, Germany, France and Italy.
Yet something didn’t seem quite right to me. While the IFS graph shows annual growth in the second quarter of this year at 1.3 percent – which conforms with IFS data – it shows the average of the other advanced economies significantly higher – at around 1.7 percent. Yet the published growth figures for these economies suggest a different story – the US grew at 2.3 per cent, France 1.4 per cent, Germany 0.4 per cent, Japan 1.0 per cent and Italy minus 0.1 per cent. That gives an average of 1.0 per cent, suggesting the UK is outperforming these economies.
When I challenged the IFS on this it pointed out that the average for other economies has been weighted – i.e. it is adjusted to take into account the size of these economies. Because the US economy is so much bigger than the others, it drags the average upwards. What the IFS graph is really doing is showing that the UK has performed relatively poorly since 2016 compared to the US. But is that due to Brexit or the Trump effect? It is an apt demonstration of how you can play around with figures until you get the answer you want.
Recent economic growth in Britain has certainly been disappointing, and has been ever since the 2008/09 crisis – largely due to weak productivity. It is also true that UK growth has performed especially poorly – GDP turned negative in the second quarter, shrinking by 0.2 percent, meaning that if growth is negative for the third quarter too the doom-mongers will finally get the recession they have been predicting for the past three years. Yet the reality is that most developed economies have been struggling since the economic crisis and all have suffered particular weakness in recent months. The whole world seems to be heading towards recession.
Now you may argue that Brexit, and the associated uncertainty, has been a factor in that (I would argue that the US-China trade war is a bigger influence), but to use weighted GDP figures to try to claim that the UK is underperforming other advanced economies and to try to deduce from this that the UK economy would now be £60 billion larger had we voted to stay in the EU is spurious to say the least.
No one has any idea of what size the UK economy would now be had we voted to Remain. The IFS is just guessing – as were all those economists who predicted catastrophe after the Brexit vote.