Given that the UK’s general election is supposed to be about Brexit, and that one of the biggest issues about Brexit is supposed to be the economy, it is remarkable how little the economy has featured in the election.
As the campaign enters its last few days, public debate has been dominated by issues of health and social spending on the elderly, nuclear weapons, terrorism both past and present, policing and security. But despite significant differences in their manifestos on the subject, the leaders of the main parties have said little about the overall management of the economy, especially in the short to medium term.
This is a striking and disturbing omission. While the economy rode out the Brexit referendum result last year without suffering the shock that many had predicted, there have been recent signs of weakness. If the Brexit negotiations turn difficult, as seems all too likely, renewed pressure on the currency and consumer confidence could well turn into something quite serious.
In the aftermath of the Brexit referendum vote, one group of people, foreign exchange traders, decided that the economic impact would be significant. Another group, consumers, did not. The sharp fall in sterling, most of which has persisted since, suggested investors thought the UK had suffered a long-term lack of competitiveness relative to other economies. Households, on the other hand, continued spending, fuelled by growth in credit. Gross domestic product expansion remained healthy for the last half of the year.
The actions of the first, however, have increasingly had an impact on the latter. The depreciation of the currency has fed through into inflation, which has increased to a four-year high. The increase seems likely to end a long-awaited two-year period of real wage growth and undermine consumer spending. There are other signs that households are feeling less confident: both house prices and rents have fallen recently, the latter for the first time in eight years.
It is also an open question whether net trade will make up for any softening in domestic demand. Following the last big sterling devaluation during the global financial crisis, growth in exports was disappointingly weak.
None of this is conclusive evidence that a significant slowdown is in train. The economy has weathered larger movements in exchange rates without too much trouble. The Bank of England has the right idea in keeping the stance of monetary policy very loose until it sees definitive signs of a pick-up, and is not liable to overreact to an increase in inflation as long as underlying spending growth is low.
But if the post-election Brexit negotiations start to go badly, the risk of a further downgrade in UK growth prospects, and with it more falls in sterling, will only increase. If anything, the financial markets have been quite sanguine about Brexit. The pound may have fallen, but stock prices have performed well. They may be less buoyant if the UK approaches a hard Brexit, and with it disruption to trade and finance.
In that sense, rather than tweaking the fiscal policy framework — an event that seems to happen on an annual basis in any case — the best economic policy for the medium term that could emerge out of the election is a commitment to as soft a Brexit as possible.
In six months or a year’s time, when the immediacy of security and policing issues will hopefully have faded, voters may well be wondering why such a central issue as the economy received so little attention. Britain’s economic performance has been happily robust since the referendum. The ultimate effect of that vote may not be so benign.