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Brexit won't hit economy as much as 2008 recession, IFS think-tank believes

Published 29/11/2016

Paul Johnson of the Institute of Fiscal Studies, told MPs Brexit should not hit the economy as much as the 2008 crash
Paul Johnson of the Institute of Fiscal Studies, told MPs Brexit should not hit the economy as much as the 2008 crash

The hit to the UK economy as a result of Brexit is unlikely to be "anywhere close" to being as damaging as the 2008 crash, the head of a leading economic think-tank has told MPs.

And the director of the Institute for Fiscal Studies, Paul Johnson, said it was possible that the downturn predicted by many forecasters "may not materialise" - though things "may turn out considerably worse".

Mr Johnson said it was too early to be sure how the referendum vote would impact on the UK economy in the long term, as hard data on inflation and private sector investment was not yet available.

However he told the House of Commons Treasury Committee that - unlike in most periods - economic forecasters were at least able to be certain that there was uncertainty ahead.

"I don't think it is within most people's bound of uncertainty that we will have anything close to what happened in 2008, but there are changes coming along and we don't exactly know how the economy will respond to them," said Mr Johnson.

Asked whether it was certain that the slowdown in GDP growth forecast by the Office for Budget Responsibility - which last week downgraded its projections from 2.2% growth to 1.4% in 2017 and from 2.1% to 1.7% in 2018 - would occur, he replied: "There is uncertainty about it. It may not materialise. Let's hope so."

Mr Johnson stuck to his analysis that the UK was facing a "dreadful" 13 years of zero wage growth, after inflation is taken into account. Even if wage growth picks up sharply, real incomes were still unlikely by 2021 to be more than a tiny fraction above levels in 2007 - a far lower rate of growth than in any decade at least since the 1920s.

And he told the committee that the IFS remains convinced that the best Brexit outcome for the UK economy would be to remain within the European single market.

Mr Johnson was pressed by Brexit-backing Conservative MP Jacob Rees-Mogg over whether adopting zero tariffs on imports from around the world - something which would require leaving the single market and customs union - would boost the economy by making goods like beef less expensive.

He responded that, while abolishing tariffs might deliver benefits over time, it would "clearly have at least a short-run impact on the structure of the economy" which would impose costs as certain sectors are hit by competition from cheap imports.

"Broadly speaking, we have said that a world in which we remain in the single market is likely to be better for our national income than a world in which we move outside," said Mr Johnson.

Mr Johnson and IFS deputy director Carl Emmerson stressed that economic forecasting was an uncertain science, to the extent that there was still a one-in-three chance that Chancellor Philip Hammond will meet George Osborne's target - which he ditched in last week's Autumn Statement - of reaching surplus in 2019/20.

But Mr Johnson cautioned that forecasts in the years since the 2008 crash had tended to be over-optimistic, and there was no reason to assume the opposite was true now.

"We may well still be getting the answer wrong, but we don't know in which direction," he told the committee. "In one sense, the forecasts from the OBR look relatively positive.

"If they are making the same kind of mistakes they were making four or five years ago, things may turn out considerably worse. On the other hand, it could be we have reached the flipping point at which forecasters are being too gloomy.

"These things might turn out to be wrong, but they are the best we have to go on at the moment. I don't think there's any good reason for thinking they are particularly biased in one direction or that the bias has moved from positive to negative."

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