Video report by ITV News Economics Editor Joel Hills
“What makes a good chancellor?” I asked someone at the Institute for Fiscal Studies earlier this week. “They need to be lucky,” I was told.
It’s too soon to know how lucky chancellor Sajid Javid will be, but he arrives at Number 11 at an unfortunate time because the economy has contracted on a quarterly basis for the first time in almost seven years.
After all the talk of “turbo-charging” last week, the economy has found a reverse thrust. Between April and June real GDP fell 0.2 per cent.
The chancellor is putting a brave face on it, arguing the British economy is “fundamentally strong” and he points to record employment and strong pay growth as proof. “I do not expect a recession,” he insists.
The financial markets don’t seem to share his confidence regarding our future prospects. The pound fell after the GDP figures were announced. Sajid Javid is a former investment banker, he believes in markets. Investors have been selling the pound ever since Boris Johnson came to power. That’s not a vote of confidence.
Sajid Javid is betting on an economic rebound, he may get one. Much, of course, depends on the sort of Brexit we get.
Some of the factors that have pulled the headline GDP number down are temporary. The stockpiling sugar rush of firms prepared for no deal in March wore off, and car makers brought forward their annual shutdowns to April.
But there are reasons to doubt how robust the economy is. The underlying figures have slowed. Growth in the service sector (80% of the economy) is the weakest for three years, the slump in manufacturing output was the worst since 2009. Household expenditure held up but, once again, business investment fell sharply (-0.5%).
Bank of England believes there’s a 1 in 3 chance Britain will experience its first recession since the financial crisis by the beginning of next year, and that’s based on an assumption that Brexit will be smooth. It could be messy.
Most economists have sounded clear alarm bells about the economic damage no deal would cause. Sajid Javid is spending £2.1 billion extra on contingency planning but last week the governor of the Bank of England, Mark Carney, made it clear that he believes that no amount of planning between here and the end of October can “eliminate” the negative impact an abrupt departure from the EU would cause, it can only soften the blow.
In the event of no deal the Bank expects the pound to fall, prices to rise and growth to slow. The Office for Budget Responsibility (OBR) believes even a benign hard Brexit will blow a £30 billion hole in the public finances.
The new government has spent the last two weeks splashing the cash. It’s promised more police officers, more money for the NHS, more money for schools and high speed train improvements.
I suggested to the chancellor that these promises now look reckless. “I don’t agree,” Javid replied. “The economy is growing”. Only it’s not.
The chancellor insists that even in the event of no deal that the government will deliver on the spending promises it has made and believes they will be paid for by future economic growth. In the circumstances that’s a very brave assumption. Borrowing may have to take the strain.
You will recall that Sajid Javid used to believe that leaving EU bad idea. He voted Remain and just before the referendum he argued that a vote for Leave was a “vote for a decade of stagnation and doubt”.
“Just like the Bank of England Governor Mark Carney and IMF head Christine Lagarde, I still believe Britain is better off in. And that’s all because of the Single Market,” he wrote in the Telegraph.
Javid claimed that the Single Market was “a great invention”, that no other free trade deal could “come close” to matching the benefits of membership and that quitting the Single Market would be a “bet” on “the jobs of millions of British workers”.
Three years on it’s a bet he’s prepared to take. Sajid Javid is a key minister in a government that is determined to lead the UK out of the Single Market.
A man who used to believe used that leaving the EU would be a rather foolish act of economic self-harm now appears to believe that no deal is doable.