Belfast Telegraph

Esmond Birnie: History shows that we must be cautious about Brexit forecasts

By Dr Esmond Birnie

All economic forecasts should be handled with care. They are not really predictions about the future. Instead, they are a view of what could happen if certain assumptions are assumed apply.

Therefore, while it is inevitable that yesterday's publication of detailed Brexit forecasts from HM Treasury has attracted a lot of attention, we should be cautious. The experience of the Treasury's mistaken forecasts ahead of the 2016 Brexit vote when they forecast an immediate and severe recession is an important warning.

Tuesday's forecasts indicate that 15 years from now UK output (GDP) could be up to 9.3% lower than it would otherwise have been in a no-deal scenario. The "hits" to output are less in the case of a Canada-like UK-EU free trade arrangement (-6.7%) and a Norway-like membership of the European Economic Area (-1.4%) but still considerable. Application of the Chequers' plan (broadly similar to the draft withdrawal agreement which is currently on the table) implies a reduction of about 2.5%. Given the structure of our economy, Northern Ireland would be one of the UK regions which might suffer a disproportionate impact although the Treasury imply they may not have fully captured difficulties relating to trade across the Irish border.

None of this means we are poorer in absolute terms. It does imply that UK output and output per head in 2033 is lower than it would otherwise have been.

To be fair to the Treasury document it does state some caveats.

It does not, for example, allow for the full range of factors which could impact on future economic performance. Very importantly, it does not allow for policy changes in the UK. Arguably, the Treasury has underestimated the extent to which the Brexit downside could be mitigated given the growth of the service sector and the re-balancing of the world economy towards the emerging markets (and any new free trade agreements with those markets).

The Treasury has not allowed for the possibility that businesses could respond to a lower supply of migrants from the EU by raising their productivity level.

As always in economic modelling, the results given depend critically on the assumptions made. Crucially, the Treasury assume a very large reduction in EU-UK trade but the theoretical case for that may be flawed.

They may not have sufficiently allowed for the fact that since the early 1990s the proportion of UK (and Northern Ireland) exports going to the EU has been declining. Furthermore they have assumed that there is a very strong feed through from lower trade to lower productivity.

There is therefore room to debate just how big any long run negative impact on the economy will be.

One thing most people will probably agree with Chancellor Hammond on is his assessment that the public's view of Brexit will be shaped partly by a perception of the political gains and losses as well as any future economic impact.

Dr Esmond Birnie is senior economist at the Ulster University business school

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