Warnings of Brexit ‘disaster’ may have been exaggerated

Brexit could be another case of expert predictions of dire consequences to political decisions proving overheated.

Predictions of economic fallout from Brexit may prove overly pessimistic.

It’s early, but data so far suggest the British decision to leave the European Union could be another example of a recurring phenomenon: expert predictions of dire consequences to political decisions that end up proving overheated.

Economists are good at digging into the forces behind inflation or productivity, or exploring the downsides of wealth inequality. But they face steeper challenges in extrapolating from political events, especially ones with few or any past corollaries.

“Forecasters often feel incentivised to pump up the probability of worst-case scenarios,” said Philip Tetlock, an expert in political forecasting at the University of Pennsylvania. Forecasters may inflate the probability of disasters as a way to increase the salience of a warning, or because they believe that proving prescient will be something they can boast about, while proving mistaken will be something most people forget. “Over time, this has some corrosive effect on trust in the expert community,” he said.

There’s a rich recent history of cataclysms that didn’t happen.

Some economists warned the US congressional budget battles in 2013, which led to sharp spending cuts known as sequestration, could throw the economy back into recession. The economy grew 2.7 per cent that year.

Then, in 2010 and 2012, some economists warned the Federal Reserve’s massive bond-buying program would cause hyperinflation, soaring commodity prices and a collapse of the dollar. Nothing of the sort occurred.

Warnings abounded in 2015 that if Greece rejected an international bailout, it could spark a sovereign default or a banking crisis or Greece being cast off the euro. Greece’s economy is far from a success story, but it hasn’t gone bankrupt.

Its banking system has been battered and drained of deposits, but hasn’t collapsed. It remains in the euro. So what about Brexit? It’s now been two months since British voters on June 23 cast their ballots to exit from the European Union, and it’s becoming unclear if the recession so many feared will materialise — at least in the near term.

It’s worth revisiting the level of concern prior to the vote. George Osborne, the Chancellor of the Exchequer, said a vote for Brexit would cause a “DIY recession”. In the immediate aftermath of the vote, many market economists forecast recession would begin almost immediately.

In the days after the vote, ­global stockmarkets indeed fell sharply. Perhaps if it had been just a little bit worse, a broader panic would have sent things into a ­spiral.

Instead, markets have rebounded. The FTSE 100 climbed to near-record levels by the middle of August.

Nor has the wider economy shown many signs of a coming downturn.

Retailers initially saw their sales plunge but that sharply reversed in August, according to data from the Confederation of British Industry. Britain’s measure of jobless claims dropped in July, showing that in aggregate, employers didn’t slash jobs because of the vote.

The leading British home builder, Persimmon, said interest in home buying remained “robust” and predicted good autumn sales.

To be sure, it is still early days, and the data could be slow to recognise a downward turn. Adam Posen, president of the Peterson Institute for International Economics and a former Bank of England policymaker, said that even if Britain technically skirts recession, its economy will ultimately prove to be quite clearly damaged, which would vindicate many of the warnings.

Nonetheless, observers of Brexit “should have realised the concerns were overblown at the time”, said Jay Bryson, global economist for Wells Fargo Securities, who had predicted Britain might slip into a modest recession but that the country was too small to cause much direct damage to the rest of the world.

After all, the Bank of England has its own currency, which allowed the pound to quickly depreciate. The central bank cut its benchmark rates to the lowest in its 322-year history. Brexit triggered a year-long process to leave the European Union, not an instant one, meaning that monetary policy and the currency would have time to adjust.

The charitable view is that the risk was very real, but the Bank of England acted swiftly, and the world just got lucky this time.

“The market reaction has been quite calm, but it could have been different,” said Paul Sheard, the chief economist of S&P Global.