Summers: Brexit was historic economic error which pushed up inflation
Brexit was a “historic economic error” which has hurt the UK economy and helped to drive up inflation, Larry Summers, the former US Treasury secretary has warned.
Summers told Radio 4’s Today programme that UK economic policy has been “substantially flawed for some years,” and singles out the exit from the European Union as a factor driving up costs.
Asked why inflation in the UK is significantly higher than in the US, Summers explains:
I think Brexit will be remembered as a historic economic error that reduced the competitiveness of the UK economy, put downward pressure on the pound and upwards pressure on prices, limited imports of goods and limited in some ways the supply of labour.
All of which contributed to higher inflation.
Larry Summers on Today eviscerating Brexit and its dire effect on UK economy
— Caroline Kenyon (@C_Kenyon1) June 1, 2023
[The US consumer prices index fell to 4.9% per year in April, while UK inflation was 8.7%.]
Summers adds that the Bank of England also blundered, saying:
I think that was reinforced by very ill-judged monetary policies that were substantially too expansionary for too long.
[A report last week showed that Britain’s departure from the European Union has accounted for about a third of the increase in food bills for households since 2019, equivalent to about £250.]
Q: Is the chancellor right to say [last week] that if interest rates have to continue to rise for longer than people hope for, in the interest of bringing down inflation, that is a better thing to do?
Summers says it is better to stick with the unpalatable medicine of higher rates, rather than stopping the treatment too soon and risk “a recurrence of the underlying infection”.
Usually when you’re prescribed a course of medication, even if the drugs are not so pleasant themselves, and even if they possibly have some side effects, it’s usually better is to take the whole course of medicine, the first time it’s prescribed than to stop taking the medicine early.
Q: So we are heading for a recession in the UK (as some economists fear)?
Summers says he would be surprised if two more years passed without the UK entering into recession, but will leave forecasts to the UK experts.
Summers also warned that the US is on “an unsustainable borrowing trajectory”, which required a significant adjustment.
The US should increase its revenue base, Summers argues, so it can increase tax revenues. He also argues US spending should be contained, although that won’t be easy as national security and defence needs are rising, as is price of healthcare and education.
Key events
The head of the European Central Bank warned this morning that eurozone inflation remains too high, even as interest rate rises start to have an effect.
Christine Lagarde said in a speech that:
“Today, inflation is too high and it is set to remain so for too long.
“That is why we have hiked rates at our fastest pace ever – and we have made clear that we still have ground to cover to bring interest rates to sufficiently restrictive levels.
Here’s our news story on Larry Summers’ comments on Brexit this morning:
In the airline industry, domestic travel has now fully recovered from its slump in the pandemic.
Worldwide domestic traffic rose 42.6% year-on-year in April, and was 2.9% higher than in April 2019 results, data from industry body IATA shows.
But overall, global traffic is now at 90.5% of pre-Covid levels.
The recovery in air travel shows economic activity is recovering from the Covid-19 shock.
Increased flights is a blow to efforts to stem climate change. France, though, is pushing back with a ban on domestic short-haul flights where train alternatives exist.
Larry Elliott
Despite concerns that Brexit is a blunder, the opposition Labour Party continue to argue that Britain’s future is outside the EU (Keir Starmer wrote as much in the Express this week).
Our economics correspondent, Larry Elliott, has written about the two main political parties are converging on key issues, including Brexit.
Here’s a flavour:
Neither party wants a second referendum, or even a renegotiation that would involve going back into the single market. Rishi Sunak and Keir Starmer are both keen to remove some of the trade friction between the UK and the EU, but that is as far as it goes.
For a variety of reasons, the right’s vision of a post-Brexit Britain in which the economy would be made more competitive as a result of lower taxes and deregulation has never materialised. Nor was it the sort of Brexit leave voters in the less well-off parts of the country wanted anyway.
Starmer and Reeves hope to convince the public that there is a better way to do Brexit. They will be helped in this by the second strand of the new consensus: the recognition that a bigger and a more activist state is here to stay.
And here’s the full piece:
Concerns that Brexit trade tensions would hit UK exports became a reality last month, says Dr. John Glen, chief economist at the Chartered Institute of Procurement & Supply.
Glen says this led to the drop in sales to Europe, and in manufacturing growth, which was reported in this morning’s factory PMI data.
He explains:
“Improved efficiencies in supply chains were partly to blame for the four-month low in new orders as safety stocks were used up and especially domestic businesses became more confident that ordered goods would arrive. However, another fall in export orders for the sixteenth month demonstrated that customers from overseas became tired of additional administrative Brexit checks. The fear around near shoring goods became a reality and the fall in overseas interest was the fastest since January.
Fears of more interst rate rises, and stubborn inflation, will continue to keep business owners awake at night, Glen predicts, adding:
The threat of recession narrowly missed at the end of last year hasn’t passed entirely so businesses will be tightening their belts for lean times to come which could include more job shedding and reduced operations.”
Post-Brexit checks hit sales at UK factories
Brexit was partly responsible for the drop in UK factory output last month (see earlier post).
UK manufacturers reported that some of their EU customers are switching to local sources to avoid “post-Brexit trade and transportation complications”, due to trade frictions at the border.
That contributed to weaker demand from Europe, and an overall drop in new export orders fell for the sixteenth consecutive month in May.
Rob Dobson, director at S&P Global Market Intelligence, said:
Manufacturers are finding that any potential boost to production from improving supply chains is being completely negated by weak demand, client destocking and a general shift in spending in the UK away from goods to services.
These factors are also driving a broad decrease in demand from overseas amid reports of lost orders from the US and mainland Europe.
The retrenchment in export demand is also being exacerbated by some EU clients switching to more local sourcing to avoid post-Brexit trade complications.
Euro zone core inflation has turned the corner and is clearly moderating, says Moody’s Analytics economist Kamil Kovar.
One month could be a fluke.
Two months could be a coincidence.
Three months is a trend.
Euro zone core inflation has turned the corner and is clearly moderating. pic.twitter.com/mLQ9mcT70Z
— Kamil Kovar (@CrisisStudent) June 1, 2023
Piet Haines Christiansen of Danske Bank says the eurozone is now experiencing a “disinflation impulse”, as price pressures ease.
Euro area disinflation impulse kicks off, which is a feature, not a bug.
The question is not whether inflation will fall, but how fast and to what new level. pic.twitter.com/A4kJWuoExN
— Piet Haines Christiansen (@pietphc) June 1, 2023
The drop in UK mortgage lending in April (see earlier post) indicates there could be further house price falls, according to accounting firm RSM UK.
Thomas Pugh, economist at RSM UK, explains:
‘The fact that net mortgage lending turned negative in April, contracting by £1.4bn, the lowest level on record excluding the pandemic suggests house prices have further to fall.
The small drop in mortgage approvals, partly reversing the rise in March, reinforces this message. Indeed, higher interest rates and falling real incomes will limit buyers ability to meet high prices. We expect a peak to trough fall in house prices of between 5% and 10%.
Nationwide’s house price data this morning showed UK house prices are 4% down from their peak last August, following the biggest annual drop since 2009.
The drop in eurozone inflation in May might not stop the European Central Bank continuing to raise interest rates.
Clémence Dachicourt, senior portfolio manager at Morningstar Investment Management, says the ECB has ‘further to go’ in its fight against rising prices:
“Whilst headline inflation numbers have benefited from a recent decline in energy and food prices over the recent months, the European Central Bank has further to go to bring inflation back to its 2% medium term target as core goods and services inflation remain stubbornly high.
In addition to underlying trends in inflation, the ECB will focus on incoming economic and financial data as well as the strength of its monetary policy transmission before it contemplates pausing its rate hiking cycle.”
#Eurozone #inflation fell more than expected in May on easing food and declining energy prices BUT core CPI also dropped. CPI slowed to 6.1% in May YoY vs +6.3% expected, tumbling from a 7.0% rise in April. Core CPI dipped to 5.3% in May vs 5.5% expected from 5.6% in Apr. pic.twitter.com/0tlKtEJryF
— Holger Zschaepitz (@Schuldensuehner) June 1, 2023
Eurozone inflation falls to 6.1%
Just in: Inflation across the euro area has dropped, helped by a fall in the price of energy.
Eurozone CPI inflation is expected to be 6.1% in May 2023, down from 7.0% in April, statistics body Eurostat has reported.
That takes annual inflation closer to the European Central Bank’s target of 2% – although prices are still rising three times as fast as the ECB is aiming for. In May alone, prices stagnated.
Food, alcohol and tobacco prices rose by 12.5% over the last year, down from 13.5% in April.
Industrial goods inflation slowed to 5.8% from 6.2% in April, while services inflation nuded down to 5.0% from 5.2%.
Energy prices fell by 1.7% compared with April 2022 – as the inflation data catches up with the surge in costs after Russia’s invasion of Ukraine. That’s down from a 2.4% rise in the year to April.
Encouragingly for the ECB, core inflation (stripping out energy, food, alcohol and tobacco) fell to 5.3%, from 5.6%.
European stock markets are rising from their lowest level in two months this morning.
The FTSE 100 index has gained 48 points, or 0.65%, to 7494, amid relief that the US House of Representatives passed a bill to raise the debt ceiling on Wednesday.
That paves the way for the US to lift the limit on its national debt and avoid a catastrophic default – although the bill still has to clear the Senate.
Germany’s DAX and France’s CAC are both up around 1%.
UK mortgage approvals fell as borrowers retrench
The number of mortgages being approved by UK lenders fell in April, new data from the Bank of England this morning shows.
There were 48,690 new mortgages signed off in April, down from 51,488 in March. That’s the lowest since February.
There were 48,690 mortgage approvals in the UK in April 2023 according to the Bank of England, which is 5.4% lower than in March, 26.0% lower than a year ago & 25.6% lower than the average number of mortgage approvals between 2018 & 2019.#ukhousing #housing pic.twitter.com/hFuB4WYESB
— Noble Francis (@NobleFrancis) June 1, 2023
The BoE also reports that homeowners made the biggest net repayment of mortgage debt on record – if you ignore the pandemic period.
That suggests the rise in interest rates is encouraging borrowers to pay down their mortgages.
The BoE says:
Borrowing of mortgage debt by individuals continued to decline from net zero in March to £1.4 billion of net repayments in April. This is the lowest level on record, if the period since the onset of the Covid-19 pandemic is excluded.
Emma Fildes, of property agency Brick Weaver, points out that the ‘effective’ interest rate paid my borrowers rose:
Mortgage debt & lending declines to record levels in April taking net borrowing of mortgage debt to its lowest level since April 1993 (exc pandemic) Borrowing of mortgage debt by individuals declined from net zero in March to £1.4bn of net repayments in April @bankofengland pic.twitter.com/3rQw01tlCb
— Emma Fildes (@emmafildes) June 1, 2023
As the “effective” interest rate rises 5 base points in April to 4.46. Net mortgage approvals for house purchases fell from 51,500 in March to 48,700 in April, while approvals for remortgaging increased slightly from 32,200 to 32,500 during the same period
— Emma Fildes (@emmafildes) June 1, 2023
UK factory output falls again
Just in: the UK’s manufacturing downturn deepened in May, at the fastest rate since January.
Purchasing managers at UK factories report that output, new orders and employment all contracted at a faster rate last month.
Manufacturers were hit by weak domestic market sentiment, lower new export order intakes and client destocking, which offset benefits from improving supply chains, data provider S&P Global has reported.
This pulled its manufacturing PMI index down to a four-month low of 47.1 in May, down from 47.8 in April but above the flash estimate of 46.9 reported during last month. Any reading below 50 shows a contraction.
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