‘Economists for free trade’ contradicted by today’s GDP data
In a provocative piece this week (‘From Project Fear to Project Prosperity’), Professor Patrick Minford made a number of claims about the post-referendum economy. Apparently “the devaluation brought on by Brexit is acting as a powerful stimulus to the economy …”. Here’s how:
… switching demand away from consumers to net exports and business investment, and boosting corporate profits.
Let’s examine each of these claims in sequence. [Spoiler: the argument doesn’t stand up]
“Switching demand away from consumers …”
This much appears true. ONS figures show household consumption slowing to a near standstill, with quarterly growth of 0.1% in 2017Q2 following 0.4% in 2017Q1. Quarterly growth averaged 0.75% over 2016, so that’s a big change. I have a sense this might exaggerate the scale of the slowdown, not least because retail sales picked up and credit growth is still strong. But, whatever, the comment isn’t false at this stage.
“… to net exports”
Er, no. Over the year, the trade deficit has deteriorated (in cash terms) from £7.8bn in 2016Q2 to £8.9bn in 2017Q2. There are two problems. First exports of goods are matched by a corresponding (and more sustained) increase in imports of goods – see the chart below. The EEF reminded us a few weeks ago (here) that “the impact of the sterling depreciation on the manufacturing sector was more nuanced than economic theory suggests given the dependence of manufacturers on imported materials and components”. Second, over the past year, exports of services have declined (by -1.3%) and imports haven’t (rising by 0.5%).
Exports (X) and Imports (M), % four quarter growth
“… and business investment”
Completely clear cut no. Business investment has ground to a halt. It grew by 0.0% on the quarter and 0.0% on the same quarter a year ago.
“… and boosting corporate profits”
This one is true, but so what? ONS data show a rise in profits of 6.2% on the year compared with a decline of -1.4% a year ago.
The trouble is demand was ‘switched’ to nowhere. Demand across the board is weak. Ironically the only area supporting demand, apart from what’s left of consumer demand, is government investment and consumption. Here’s a chart showing the contributions to quarterly GDP(E) growth (I’ve had to add net trade into the residual category as it is so volatile on this basis):
Demand, percentage point contributions to quarterly growth
In fact government consumption and investment accounted for 85 per cent of growth in the latest quarter. Too little too late, but a start. Moreover, Professor Minford is not known for celebrating the way the government can contribute to the economy.
Back to profits. How can they be up if everything else is down? Well, total income (GDP) is equal to profits plus labour income. With total income growth down and profit growth up, labour income growth must be down. Employment growth, wages growth and self-employment incomes are all weaker. What with the other effect of devaluation – rising inflation – that’s a big hit on real incomes. And that’s hardly good news.
‘Project Prosperity’ has not materialised. Insofar as the data reflect reality (and there is uncertainty), that’s a fact.