Forecasts for British growth over the coming five years from the Office for Budget Responsibility (OBR) are “overoptimistic,” according to a new note from economists at Morgan Stanley circulated on Thursday.
On Wednesday, the OBR — the independent agency created by the government to provide economic forecasts and analysis of the public finances — published its latest predictions for the British economy going forward.
The figures, as always, made up a crucial component of the Autumn Statement, the first delivered by Chancellor Philip Hammond.
Hammond presented the latest forecasts from the OBR, showing that it expects the British economy to grow 1.4% in 2017, down from 2.2% in previous OBR forecasts thanks to “lower investment and weaker consumer demand,” driven by the Brexit vote.
He noted that this is equivalent to the IMF’s forecast for growth in Germany next year and better than forecasts in Italy and France.
The OBR’s full suite of forecasts for the coming five years:
The long and the short of the forecasts is that the Brexit vote is going to provide a substantial drag on UK growth for the next few years, before growth returns to “normal” levels of around 2% by 2019.
However there is a problem with that analysis, Morgan Stanley’s UK economics team, led by Jacob Nell say. The OBR is being too optimistic in its forecasts.
“OBR growth and therefore fiscal forecasts look optimistic, for three reasons,” the team writes in its “Borrowing for Brexit” note.
The reasons are as follows:
- “First, the OBR only assumes a mild hit to growth during the Brexit negotiations in 2017 and 2018, where we see a more substantial impact.”
- “Second, the OBR has growth back at a trend 2.1% in 2019 to 2020 in the immediate aftermath of UK exit, while we think that the trade negotiations,and associated uncertainty weighing on growth,are likely to persist for longer.”
- “Third, we think the risks are skewed to a worse outcome (Exhibit 4) — a hard Brexit with restrictions on UK access to the single market — given the UK’s insistence on national control,and the EU’s view that participation in the single market is dependent on meeting the obligations of membership, including accepting free movement of labour.”
Exhibit 4 can be seen below:
As a result, Morgan Stanley thinks that longer-term growth will actually sit at something around 1.6%, rather than the 2.1% the OBR expects. That’s thanks to “reduced trade, migration and capital flows,” Nell and his team say.
Interestingly, Morgan Stanley’s take on the OBR’s numbers is the polar opposite of the view given by many pro-Brexit politicians.
Iain Duncan Smith, the former work and pensions secretary, said the forecasts represent “another utter doom and gloom scenario” put together by an organisation “that simply hasn’t got anything right.”
Tory Brexiteer Philip Davies agreed with IDS’ opinion. Speaking to The Telegraph, he said: “It seems their forecasts are based on their personal political opinions about Brexit rather than on any genuine attempt at an accurate and independent forecast.”
Another minister told the newspaper: “We were told we would be in a recession after Brexit. We are not. These predictions are worthless.”
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